03 Jun The Critical Part Of Growing An Account
The Critical Part Of Growing An Account
June 3, 2020
How can trading change someone’s life?
There are two major ways.
One, trading can provide a long-term way to grow money.
Some traders don’t need money right away and don’t need the rush of action. They just want a place to put their money and see it grow over time. These traders see the folly of buy-and-hold and know trading is the key for long-term growth.
They want to set up a system, forget it, and provide a nest egg for themselves and their family.
The other big way is through fast growth.
Many lives have changed by taking a small account and growing it to something substantial. Doing that could lead to quitting one’s job, altering one’s lifestyle, a life on the beach, or a vehicle to give back to others.
If a trader has $2,000 and then turns that into $100,000, life is no longer the same.
Of those two, I get more emails about fast-growing. Most traders starting out don’t have a million to invest. They have a small amount and they want to get started.
And they want explosive growth.
This desire comes with problems.
For one, it’s hard! Looking around the internet, there’s one firm out there who’s grown a fund at 40% or more over a sustained period of time. One.
Yet, most beginning traders I hear from say they’re looking for 100% per year.
It’s really the equivalent of saying, “I want to win Wimbledon this year!” when you’ve never picked up a racquet.
But asking for reasonable, quick growth isn’t too much. Research shows that a small account can grow quickly. (I’m actually trying to do this in real time as proof.)
There’s one critical element, though, when looking for explosive growth.
There’s an old saying, “If a dog is going to bite you, he’ll do it as a pup.”
If you’re going to blow up a trading account, you’ll do it at the beginning.
That being the case, here’s how the sad version plays out.
We get excited. We want our account to grow. We use a trade size that will give us very quick growth. We don’t use stoplosses because “how will my account grow if I take losses?”
We win a couple trades. Our small account immediately grows.
“I’ve made 15% in a two weeks!”
Then the next trade starts losing. The big trade size doesn’t need much movement to wipe out all our gains quickly. It also doesn’t need much movement to wipe out the whole account.
We go from +15% to zero in less than a month.
“I’m never doing that again.”
Trading career over.
Once we’re a year or two down the line, the danger of blowing up gets less and less.
We’ve pushed the limit while growing and now we can throttle back.
We’re also less emotional.
Losing $1,000 when we have a $1,000 account is disastrous. Losing $1,000 when we’ve made $10,000 is a manageable drawdown.
The key is to get out of the gate.
So, the first tip? Use stoplosses. In any form.
For example, last night at the Festival of Traders, I talked about the New Monthly High System (get in on a new monthly high, exit on a new monthly low). While the losses won’t be exactly the same, we can quantify them.
On AAPL, from 2007-2020, we know our max drawdown was about $6,300. If we got that loss right away, we could possibly lose 63% of our initial account.
So, we would need to watch the beginning very closely.
As it turns out, we didn’t get that drawdown at the start. In fact, our balance never dropped below our starting amount:
Once we got to $19k, our account was no longer in danger. We survived the dangerous beginning while the stoploss guarantees the next trade won’t lose it all.
The takeaways: 1) Don’t try to grow an account quickly without the ability to quantify risk. Trading without stops is, by far, the most dangerous way to try to grow; 2) If you survive the first several trades, the risk dramatically decreases.
In our next email, we’ll see how these principles could grow an account.
Talk to you soon.
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