Your trading account balance matters much more as you advance in your trading skill than when you’re beginning, yet in order to advance and learn you must risk real money, which in the early-days can be risky and lead to significant damage to your account. Seems like some type of “cruel” paradox, right?
What good is it to be a skilled and accurate chart technician if you have lost all your risk capital along the way? You see, in the early days of your trading career, it’s not enough to just be focused on learning to trade, you also must be focused on preserving and (ideally) slowly building your bankroll (money in your account) so that as you progress and learn you have sufficient funds to properly take advantage of your trading abilities in the future.
All too often, I see traders blowing out their accounts in the early days and they end up years later with a very keen eye for predicting price action movements, with little to no money to trade with.
This lesson aims to open your eyes to the significance of the capital in your trading account and how you can protect it, keeping you in the game long enough to reach your goals of becoming a consistent and profitable trader.
Can you and your bankroll survive long enough?
If you spend enough time analyzing and watching the price action on the charts, eventually things will really start making sense, you will start seeing the market as a professional trader does. However, as you may have gathered from the title of this lesson, all the experience / screen time and education in the world won’t mean a thing if you don’t still have your bankroll intact by the time you reach the point of trading mastery.
If a person decides to go solo skydiving for the for the first time and jumps out of the plane without first getting any training, instruction or practice from experienced skydivers, it would be potential suicide. The same holds true for a trader who jumps into the market head-first, trading real money without any formal training, it’s financial suicide. Yet, everyday, droves of retail traders do it.
For some reason, most traders don’t seem to connect the dots that in order to survive in trading and produce long-term profits, they have to have money to trade with! So, I want to help YOU, the aspiring trader, truly understand both the importance of protecting the capital in your trading account and just as importantly, HOW to go about doing so.
Capital is the price of admission, without a ticket, you can’t play.
Ever hear the saying “You’ve got to pay to play”? Well, that is pretty much true for everything, especially trading. If you don’t have any money, you can’t make any money.
Think of your trading account balance as the price of admission to the markets; a daily ticket to watch, learn and improve. If you run out of money, you can’t buy a ticket, and your learning journey and career are all but over.
Obviously, many traders run out of actual money to trade with and then do stupid things like fund their trading accounts on credit, this is simply lunacy and will dig you a financial grave faster than you can imagine. Don’t ever do this.
This leads me into my next point…
What should you be risking?
I’m not going to tell you how much to risk per trade, or what % of your account to trade, because it’s not my place do so due to the many complicated factors involved. However, I will say, in the early days of your trading career, be sure you can survive losing 50 or 100 trades and still have a very large amount of your account left. Remember, you need to survive, that is the only goal here, not profits (yet), but capital preservation at all costs. You are trying to preserve your trading capital as much as possible for as long as you can so that as you learn and grow as a trader you still have money left to trade with, to take advantage of your improving skills.
I am also going to ask you to look at your overall net worth. Look at your income vs. your monthly bills and decide how much money you actually have right now to risk, as well as how much you will invest each year from your disposable income/savings to continue your trading pursuits and learning journey.
Once you have figured out your financial situation, budget accordingly and stick to that plan and don’t deviate on a whim like a gambler. Think about what’s in your account today and what you might put in your account each month/year, if you don’t, you’re going to go broke and destroy your chances of making it. The investment into trading has to be methodical and disciplined, stick to your capital plan each month/year. Most importantly, do not commit funds to trading that you can’t afford to lose or that if lost will impact your way of life significantly, never do this, especially when you don’t totally know what you’re doing yet.