Making a part time living from FX trading, can we make a reasonable return from an approx. €10K account, can raising our risk deliver the account size we need to trade full time?
From time to time it’s worth reminding ourselves why we came into this industry and in doing so we’ll hopefully redefine our vigour, our purpose and personal targets. There is no disguising, or any added sophistication needed in order to explain why the vast majority of us come into retail trading and we want to follow a pre-determined path, laid down by many who have come before us. We tend to visualize our development in three key stages:
1. We find the industry, perhaps by accident, or more likely by introduction and begin to experiment.
2. We begin to take the industry seriously and take our first tentative steps by way of opening a live trading account after developing a working and robust overall trading strategy, maybe on demo. It’s at this stage, our part time initial introduction that we begin to ask questions of ourselves as to whether or not we can possibly develop a full time occupation from this industry.
3. Having enjoyed success we now take that ‘leap of faith’ and take a commitment to trade full time. We can do this in the full knowledge that we’ve taken years to develop our trading strategy and we’re 100% confident in our abilities and that our thorough understanding and the fact that we’ve witnessed many if not all of the usual market events over the years, has left us fore-armed and fore-warned versus all major eventualities.
But the question still remains regarding the issue of capitalisation and for the vast majority this barrier to entry and indeed this barrier to further success can be one of the most difficult to overcome. Particularly if we are realistic in our ambitions and accept that risking 0.5%-1.0% per trade is more than likely going to lead to the kind of return we’ve enjoyed in previous years, roughly 50-100% per annum.
So when we’ve analysed our previous performance, perhaps contemplated other ways to increase our capital base beyond our €10K, we eventually return to the question that has been nibbling away at us and haunting us for some time; “should we increase the risk to 2-3% per trade in order to grow the account ‘organically’ to the level where we can consider trading full time?” And why shouldn’t we contemplate this? After all if we have 100% confidence in our trading strategy, have witnessed the market behave in just about every way possible over recent years, have suffered drawdowns and know our tolerance, then why should we immediately and perhaps irrationally fear moving up our risk to a greater level?
Where do we start to alter our trading plan and our overall strategy?
In the first instance it’s worth concentrating on the subject of drawdown, as our newly revised money management technique and our increased consequential risk, are going to have a profound effect on our drawdown. Were previously we experienced perhaps a 3% drawdown at 0.5% risk per trade, if we now decide to increase our risk to 2%, then naturally we may experience up to 12% as a drawdown. Now this can be quite concerning and debilitating to many traders unused to such high levels of drawdown, so we must be fully prepared for this not to affect our sense of trader ‘well-being’ at the outset. Thereafter the rest of the modifications we should adopt should be relatively small.
In theory we don’t have to change any other key ingredients of our trading plan other than the risk and money management and in terms of our three Ms it really is the mind-set that could be the factor that causes the overall trading strategy to break down irreparably if we’re not prepared mentally for the challenge. Therefore we have to concentrate and focus on the reason why we’re increasing our risk and what are medium to long term targets are; this is our chance of having a tilt at ‘going full time’.
However, there is still a method for us to control our overall risk and drawdown levels and that’s to firstly scale in our risk and to attach a time scale. So instead of immediately upping our risk to 3% we scale it in over a set period, perhaps over six months with small increments of 0.25% per month.
But it’s important that, irrespective of the performance, we alter the risk monthly as we are only too aware of the random distribution our probability based industry can throw up. In controlling the risk by small increments we’ll be mentally conditioning our self slowly and carefully over the period, therefore we’ll be protecting our self from any market surges or deviations that may take us by surprise over the period.
In this way we can take a risk on our in initial €10K to see if we can build it up to a figure closer to €30K to give us the monetary base and confidence necessary to trade full time. And if it is successful then who’s to say that the sky won’t be the limit, that we won’t be one of those ultra-successful rare traders who can take a relatively small account onto big things?