How to grow your trading account from $100 to $1000: How to implement a winning risk management strategy

in hive-175254 •  13 days ago 
I was in a heated argument with @the-polymath. The argument was based on which trading avenue was better, trading binary options or trading forex. I was in support of trading forex while he was in support of trading binary options. Another day I commented on @azircon's post on the importance of not widening your stop loss. He was like “stops are for losers” and personally I was not convinced about this statement. I was shocked as this was the total opposite of what I stood for. Every mentor I have listened to always say "the holy grail of trading is centred around *risk management*". You hear things like don’t widen your stops, don’t invest more than 3% of your total account value, have a maximum drawdown and so on. The real truth about trading to me is the ability to control yourself and control greed. In my previous post, I talked about ways to manage risk. I said you approach management of risk in a stepwise manner. You try to avoid risks first then if you can’t avoid the risk, you then try to reduce the risk. If you can’t reduce the risk, then you share the risk. You can read more about risk management in my previous post pn risk taking. In this post, I will be writing about How to increase your capital on a small trading account through implementing a risk management strategy.

What is a small trading account?

I like to define a small trading account as an account that is less than a thousand dollar. If you have to use a mini account for your risk management to fit with your lot size, then you have a small trading account. This type of accounts are usually worth less than a thousand dollar.

How can I increase my capital in a small trading account

Making it in anything in life requires orientation,strategy and consistency. Whether betting or trading or even in the works of life. you need a strategy. In the business of trading and mainly trading small account you need to have a winning strategy. The most important strategy you need to grow your trading account is your risk management strategy. Risk management is responsible for the steady growth of any account.

what is a risk management strategy?

These are sets of guidelines and rules that guide the way you handle risk when trading with your account. Below are some tips you need to know before adopting a risk management strategy.

1. Predetermining your risk

The success of any small account trader lies in the ability to predetermine your risk before executing a trade. You might ask “what is the ideal percentage to risk for trading per trade for a small account?”
According to Investopedia, a good trader should risk between the range of 1 and 5% of his trading accoun. This therefore means that once you lose more than 5% of your account, you should step out of the trade.
According to the book the new trading for a living, Alexander Elder goes on to say the ideal risk is 2%. Another source takes 1% as the ideal risk a good trader should take per trade
I feel a trader should not risk more than 2% of your account. This means that if your account is worth hundred dollar, your maximum risk per trade is meant to be less than or equal o two dollars nothing extra
I also look at an ideal risk as anything that is not capable of altering your trading psychology. You want to risk something that allows you breathe, something that allows you sleep without thinking of the charts.

2.Accept the risk and be disciplined with it

After predetermining the risk the next thing to do is to accept the predetermined percentage. Accepting the risk means setting your trade to exit when the trade hits your predetermined risk. When you accept your risk, it simply means that there is no room for increasing the risk. In other words, accepting the risk means placing stops at the predetermined risk level and leaving it to play out.
However, this is the main problem of most trader. Most times when a trade doesn’t go in your direction, amateur traders try to make the trade go their way by increasing their risk hoping it will go back in their direction. Sometimes it might go back but most times it gets to appoint where you can’t take any further loss. Then you exit the trade with about twenty percent loss.

I read an analogy somewhere, although I can’t remember where It says

If you lose 25% of your account on one trade, you need to make 33% on that trade to get your capital back. If you lose 50% of your capital on a trade, you need to make 100% in the next trade to make your capital back.

How exhausting can this be?So therefore if you are going to risk anything, you have to risk something that will give you a chance of holding your capital and earning more.

3. Risk reward ratio.

Predetermining and accepting your risk without knowing the concept of risk reward ratio is like learning medicine without saving lives. It's totally useless.The goal of every trader is to increase his account balance and this formed the basis of my argument with @the-polymath. In order to accumulate equity, your reward has to be higher than your risk. if you risk two percent for a particular trade, your aim should be to get atleast 1.5 times the risk you put on a trade as your reward. If you risk to reward ratio is 1:2, you don’t have to win all the trades to have your account on green with a good trading system. Even if you lose five trades out of ten trades, you would still be making 10% with a standard risk of 2% per trade.

Never widen your stops, widen your take profit.

These are some of the way to accumulate capital when trading be it a small or a big trading account. In my next post I will be talking about exiting strategy, importance of having a strategy and paper trading.

On a final note, no one knows where the price is going but with adequate risk management you can grow your account. Consistency and discipline will move your account to greater heights.

REFERENCES

1.Investopedia
2.the balance
3.The New trading for a living by Dr. Alexander Elder
4 Pixabay

Thank you for reading my blog
All images on this post are gotten from Pixabay.
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@tipu curate

Upvoted 👌 (Mana: 0/4)

thanks bro

You're welcome man

Very good post my friend, very well written and structured and the topic is very well touched.
Congrats.

thank you. i hope to do better

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Excellent and fundamental advices!!

Thank you for stopping by..

This is knowledge.....thanks for sharing