Is Your Trading Capital Eroding Too Quick?
The theme, which is similar in both books, is on tracking your position sorting to about 1-2% of your capital, and that almost all successful traders will say a position at greater than 3-4% per trade is very risky. If I ever I read this I said in my subconscious, “der, it is clear, why do you say? “And then dawned on me. This is a major shortcoming in a lot of traders trading!
I had forgotten what I was like years ago when I first started, and he did remind me how far I am, but also gave me the inspiration to write this.
The desire to see the risk of large quantities per trade has happened to all traders, young or old, experienced or beginners, but what one learned over time is that the big house will not contribute to your success, neither the winning trades. What helps you a successful career trade is the ability to know that your system will give you a positive result in time.
But for this to happen we must realize that, because each system has losses, the losses should be able to occur. If you have a system that gives you the feeling to win a 70% loss ratio (you have this determined by back-testing, reviewing your past, trade and also trades you missed), of course, 30 of every 100 trades will lose.
The thing to know is what do you do if you risk 10% in each trade and you happen to 10 losses in a row? Can that happen? Of course, if it seems unlikely that can happen. What if the risk of 5% per trade? You are to only 59% (assuming that you are trading 5% of the capital) of your original capital. Now for you to make all your money back, you now have 11 winning trades in a row!
What makes this whole trading style worse is that psychologically, most can not account for a large drawdown.
The point is that successive losses can do and will act in your capital to be able to absorb and so have you. The best and only way to do this is to make your position sizes to the smallest possible amount. Sure, your savings will not grow as fast as it would if you by chance a few winning trades risking 5-10%, but that is not the problem; preservation of you and your capital.
The course of time, you will know that the composition of your returns, and with the ability to deposit funds periodically in your trading account (treated as a savings account), will lead to a scenario where you have a lot less risk. 1% of € 100000 is a lot easier to reduce the risks and trade than 10% of $ 10000. And remember, you want to make an ideal lifestyle in 5 to 10 years, or do you want to be stuck in the same job for 45 years? Patience will help you make that ideal lifestyle, not hit home runs.