I am currently trying to write a few things for my website. However, I cannot get inspired. Strangely enough, I have found I can only write and express myself effectively when teaching or addressing others.
So now I will try my best to contribute something positive to your trading education, hopefuly highlighting some area that may inspire you to do more research. It is a humble offering, and if you get but one good idea from it, it will be worth it.
In exchange, I get the opportunity to write and express myself, which I really enjoy doing… and hopefully come up with good material to present in my website.
One last thing, when I write I just type at kind of furious pace (according to my standards, that is) to let things “flow” where possible. As a result, some typos and spelling errors will slip by… and I just dont have time to edit. So pleas bear with me and overlook these mistakes, will you. So here goes…
All the time someone is asking me about initial account size for a new trader. Account size is a little relevant to the novice trader. A trader, in my opinion, must have sufficient funds to be able to diversify in at least 4 or 5 markets. Also, some funds for errors and drawdown must be there, too.
Now, in just these two statements… one can get a good clue on some of the factors that may effect success. In wanting to diversify across several markets, we want to reduce our risk by not placing all our eggs in one basket. Why? Because we want to preserve our capital. So right off, we have an area that we want to explore. Reducing risk and preserving capital. I will get to that later on.
In wanting to have sufficient capital to weather drawdowns and mistakes, we identify a few other areas of importance.
We want to be financially and mentally prepared to have losing trades.We want to be financially and mentally prepared to have losing trades. It is important to understand, accept, and expect losses.
Losses are a part of the game.
In fact, some successful traders even go so far as to say that trading IS a losing game… and that success depends on how well you handle your losers.
Some food for thought…
But in any case, we can at least realize that no system or method will be correct all the time. So some money needs to be available in order to survive our losing trades, no matter what.
But how much money to set aside for drawdowns? Well, that depends on the system or method being used. All methods have different levels of success. Some have a better winning percentage and less losers.
Also, the amount of money won or lost in losing and winning trades will vary, too. A method with a higher percentage of winning trades may not be the best system… if the losing trades are large. A system with a large percentage of losing trades may be realy good – if the losses are small and the winners large. So these factors need to be considered when setting aside funds to surviving a drawdown.
For continuation, see part two of this rather long original article.