Many traders start with small accounts and want to run with the big traders. Well, guess what? You are in a different class with a small account and a very specialized one at that. It takes skill to trade a small account and not let our ego get the best of us.
Start thinking in percentages and not dollars. What is your rate of return?
Here is a handy formula to calculate rate of return or return on investment:
Profit (Cash In) / Investment Cost (Cash Out) = % Rate of Return
Let’s say we spend $500 to enter a trade. When we close that trade, we receive $750.
- Profit = $250 ($750-$500 = $250)
- Investment Cost = $500
- Rate of Return = $250 (Profit) / $500 (Cost) = 0.5 or 50% Rate of Return
- A ten percent rate of return on a $2,000 account is $200.
- A ten percent rate of return on a $10,000 account is $1,000.
- A ten percent rate of return on a $25,000 account is $2,500.
You get the idea here. If you have a goal of $500 a week and are confident that you will be able to achieve 10% a week (which is 120% a year simple), then you need an account size of $5,000 or better. Think in percentages and not dollars.
Remember that not all trades will reap a profit, some will have losses.
Be realistic with your trading while holding the dream or goal for your future as you gain skill and confidence.
There is a simple guideline for your trading account. Take the total capital and separate into 3-5 piles of money. Each pile can be used on one trade, the next pile on a different trade and so on. One of these piles of money should be held aside for a rainy day. This will keep you from trading everything on one trade with the potential of losing it all. Live to trade another day is a good mantra.
You do not have to have a huge account in order to trade successfully. Get it in perspective by thinking in percentages.
Given “If you have a goal of $500 a week and are confident that you will be able to achieve 10% a week (which is 120% a year simple)”, I believe 10% a MONTH is 120% a year simple (10% x 12 mo) whereas 10% a week is 520% a year simple (10% x 52 wk).