How to Manage Your Capital As a New Trader
When a new trader is ready for their first live trading account, the first big decision they must make is how much of their available capital they are going to trade with.
If you regularly read our articles or watch our YouTube videos, you will know that we always mention keeping things logical when making decisions with our trading.
Unfortunately, many new traders fall at the first hurdle.
Many traders get over-excited by the potential returns they can make in the short term and open their first live trading account with 100% of their available capital, whereas some simply allocate the maximum they think they can stomach to lose.
First of all, having this kind of mindset is going to encourage you to jump into trades and rush your decision-making, due to the emotional influence of potential returns.
Secondly, even if you have followed the right process in learning the skill of trading and have consistent profits on a demo account, you still have not yet had to deal with the added pressure of trading with real money yet. This added stress is often overlooked and can lead to either over-trading out of adrenaline and excitement, or under-trading as a result of the fear of losing money. In either case the result is a decrease in trading performance.
Therefore, before you even consider the possibility of trading a live account, you need to ensure that you have nailed these three things:
- Even more practice.
How Big Should My Live Trading Account Be?
Okay, so let’s say you have done all of that and are genuinely ready to go live. How much of your available capital should you risk?
To help you decide I want you to imagine something.
Imagine that a friend comes to you with a proposal. They say they have been learning to trade, they've mastered all the tools and can show you a track record of consistent profitable results on a demo account.
Now they're asking you to part with your hard-earned cash to invest in their brand new live trading account.
How much would you invest?
I think it’s safe to say the amount would be small, if any, but definitely not 100% of your available capital.
Now obviously this is not quite the same as trading your own capital, but I hope you get the picture. We often get carried away with our own ability and think we are more dependable than we are. Try to look at the situation from an external point of view.
Instead of risking a large amount at first, a reasonable alternative would be to invest a small amount and gradually increase this over time as your confidence builds and the results stabilise.
Your Final Barrier of Defence
At this stage, if you are live trading you should already have a risk management strategy. If you don’t, I highly recommend you put a pause on live trading and evaluate how you are allocating your risk to individual trades.
In reality, losing trades/streaks are inevitable, even the best traders in the world are bound to have them due to the law of probabilities. But we need to have a point where we draw the line and re-evaluate.
If you are applying a good risk management plan and exceed a given drawdown percentage (for example, 10%) it would be wise to take a step back and begin reviewing what is going wrong.
Look at your trading journals and determine the cause of the losses. First of all, run each trade back through your trading system. Determine if you have been sticking to the system religiously or if you are suffering from a lack of discipline.
We have some tips that can help you get back on track if you are ever in that situation. Check out the video below and take action: