One thing that is greatly overlooked or even thought about is choosing your account size. On most trading blogs and sites, I rarely see it mentioned. Your starting account size is a huge factor in your trading success. For those that play poker, it is very similar to your bank roll. It determines how much you put into each trade, setting the value for your stop loss, how much you get yelled about it by your significant other.
Purpose of the account- creating disposable income, hedging a long term portfolio, or sole income
So one thing that determines your account size is what the purpose of your account is. Is it just to trade a certain product, only for options, only a forex account. If it is just specialized , you might not want to put a lot of money in it as you are giving up opportunity cost *Opportunity Cost- the cost you incur when investing in one product over another
Risk Tolerance- How Much are you willing to Lose
Everyone has a different personality when it comes to trading. Some are risk adverse ( don’t like to risk potential losses) and some a risk thill seekers that love watching their account see saw. If you are willing to lose more you can add more to your account and use it to over leverage your account, but if you’re adverse you might put less discretionary income into the account ( see next bullet)
Discretionary Income is how much money you have outside of your living expenses to use
Your financial situation should definitely impact how much you are willing to trade with. If you are just scraping by you really shouldn’t put more into your account than you can , i.e don’t use money that you have to pay for rent or food with (that is for professional traders)
If you have more discretionary income, then you might want to invest more of it into a trading account instead of buying a depreciating asset like a car, designer clothes or fancy dinners. You should use that money to invest and gain a return as each of those other purchases is an opportunity cost. Instead of making a 12% return on that money, you’re buying something you essentially need.
Loss tolerance - now much you are willing to lose without crying
I will harp on this again because this is something that breaks most traders and leads to an unsuccessful endeavor. Never risk something you can’t afford to lose. If you are going to get angry if that money evaporates then you shouldn’t be risking it. Any investment carries inheritance risk and there is a chance you lose everything. There are ways to mitigate a specific loss on a trade, but controlling your account size will also avoid a huge impact to your overall finances. Only put into what your account that you are willing to lose without have a nervous breakdown . It will only lead to more bad trades and adding more money into your account out of frustration or anger. The snakebite affect gets everyone, but the smaller your account size when it first hits you , the better chance of future success.
* Snake bite affect- a known term for when a trader loses money and then has initial hesitation in future investing. It also leads to the polar opposite and leads to illogical trades to try to regain losses. You see this in casinos a lot. It hits us all but do not fall prey.
I will give a % breakdown in the future of your account size versus how much you should risk per trade . This is just a overview on the thought process of choosing your account size. Be thoughtful on how you choose it . Some people just throw in a hundred here and there and stick it in a stock or option, but that is not the way to become successful. As always, if you have a question feel free to email me or look further through the guide, blogs, or videos to find what you need.