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In today’s episode, you’ll discover the costly mistakes to avoid when you’re trading a small account and how you can fix it.
So listen right away…
Resources
How to be a Successful Trader — A Step by Step Guide
The Complete Guide to Risk Reward Ratio
The 4 Stages of the Market Every Serious Trader Must Know
Transcript
Hey, hey, what’s up my friends?
In today’s episode, I want to talk about the costly mistakes to avoid when you’re trading a small account.
Mistake #1: Not adding funds regularly to your account
Let’s say you have a $5,000 trading account. You earn an average profit of about 20% a year for the next 20 years. After 20 years, that account will grow to about $191,000. It’s not too shabby.
But what if you add an additional $5,000 to your account every single year for the next 20 years? And you grew that account at the same 20% a year. How much would that be worth by then? Well, based on the calculation I’ve made earlier, it’s about $1.3 million.
That’s more than six times of what you had previously, had you not added funds to your account.
So the first mistake to avoid is not adding funds to your account regularly.
Don’t make the mistake of, you know, just putting money and then park there to try to let it grow into 6 or 7 figures.
It can happen, it may happen, but if you want to grow your money faster, you want to add funds regularly to your account.
Mistake #2: You have the wrong expectations about trading
Traders might often start with a $1,000 account.
They’ll think, “My account is relatively small. Oh, I’m just hoping to make this $50 a day.”
But here’s the thing…
Your expectations of the market are irrelevant. The market doesn’t care what you want out of it. By trying to say or you want to make $50 a day, that’s like saying your trading strategy has to work every single day.
Now let me ask you, would a trading strategy work all the time? Would it work every day?
Well, for a strategy to work all the time, it means that market conditions cannot change.
But if you just pull out any charts, you’ll know that market conditions change all the time.
The market goes from uptrend to downtrend, range, breakout, pullback, low volatility, high volatility, etc.
Market conditions are always changing.
It doesn’t matter how small your expectations of the market is or how little you want to profit from the market. Because your trading strategy is not going to work every single day.
It doesn’t matter whether you want $5 a day, $50 or $5,000 a day, it’s not going to care about what you want out of it.
Don’t make the mistake right of expecting to make a profit from the market every single day, no matter how small that profit is, because your trading strategy, well, it’s not going to work all the time – not every day, maybe not even every week or every month.
Next…
Mistake #3: You think in terms of dollars
With a smaller account, say $1,000 and you maybe make $300 for the year. It might seem like a pathetic return.
You’ve worked so hard, followed your plan, stayed discipline, risk management, all just for $300 a year. That sounds ridiculous.
But if you think about this, that $300 is 30% of your capital. You’ve actually made 30% for the year and that’s your return. Most fund managers would kill to have that annual return.
With a small account, I get it it’s very easy to look at how much you earn on a nominal basis. That’s why you don’t want to look at your returns on a nominal basis. You want to look at it in terms of your percentage returns.
A better way to gauge your performances is in terms of R. Because for percentage, a downside is that if you risk 50% of your account based on 1-to-2 risk-reward ratio, that’s a 100% return.
It might seem like a lot, but that’s because you took a lot of risks to get there.
So a better way to gauge your performance is in terms of R, I think this is a metric that is shared by Dr Van Tharp.
So how does R-multiple work? Let’s say you risk a dollar and you make $5. The R-multiple on that trade is your profit of $5 divided by your initial risk of $1. So that’s a gain of 5 R.
Let’s say you risk $5 and make $20, that’s a gain of 4 R. You get the picture.
So every year, you want to tabulate how much R you’ve earned from your trading.
If you make 25 R in a given year, that’s pretty good. Because if 1 R is worth 1% of your account, it’s pretty much 25% return for a year.
And if for 1 R, you risk 2% of your account, that’s pretty much a 50% return for the year.
So using the R-multiple approach is a more objective way to gauge your performance, especially when you’re trading a small account.
With that said, I’ve come to the end of today’s episode and I’ll talk to you soon.