"One of my day trading students told me he was disappointed. He has been trading $10,000 for six weeks, but realized only $600 in profits. He told me that he was considering getting out of day trading because he thought he could make much, much more. After all, $600 in six weeks is only $100 a week, just a fraction of the money he set aside to invest. He could work as a fast food clerk and make more money, so, he thought, why bother with such an inefficient form of income?
I told him he was dead wrong.
When it comes to day trading, consistency is more important than the dollar amount of your profits at any given time. This trader was already making a fortune, but he didn't know it. In fact, he was already an incredibly successful day trader, and I told him that I could likely learn something from him. All he needed to do was recognize that he was making consistent profits, determine where that consistency came from, and then apply those sound money management strategies to achieve stellar results.
We took a look at what he was doing, and I did, in fact, learn from what he was doing. He did, as well. And I want to share that lesson with all potential day traders: learning how to recognize strategies that produce consistent profits, no matter how small, rather than earning profits from individually large trades, is the key to trading success.
This is what we discovered about his plans:
First, $100 per week would amount to $5,200 per year; a 52% return on his account. That's already excellent, but it is only a sign that he could translate those profits into larger gains.
The first way to do that would be to apply sound money management techniques and increase his contract size. He was trading the e-mini S&P, 1 contract at a time. A reasonable plan in this instance would be, according to the money management system promoted by Ryan Jones' Fixed Ratio Money Management Technique. Using this technique, he would increase the number of contracts every $800, or approximately every 8 weeks assuming that he is making consistently $100 per contract per week per contract.
Using these rules, he could hypothetically grow his account from $10,000 to $26,800 in just one
year by consistently increasing the position size and achieving ""only"" $100 per week per contract. Here's a quick summary of how it would look:
Starting on September 1, with an initial account of $10,000 and a profit per contract of $100, he could make $800 by November 1. If he then put that $800 back into the account, he could now trade 2 contracts, earning a potential $200 per contract for a total o $1,600. If he then put that $1,600 back into the account, he would now have $12,400. So, come January 1, he could start trading contracts, this time expecting $300 for each, with a total profit of $2,400 at the end of the next 8 weeks. If he follows that pattern each 8 weeks, at the end of the year, his account would be $26,800, and he could be trading 7 contracts for a profit of $700 each. Expand that to two years, and his account would grow to $27,400. We're certainly making more than a fast food employee at this point.
Most traders think this kind of growth is impossible, which is unfortunate. The logic is sound: even if a trader would not achieve his goal of making $100 per week and miss it 2-3 weeks in a row, it would simply take a month longer to grow his trading account to $27,400.
Traders fail to realize these kinds of results because they let their emotions and desire for quick success get in their way. ""Only $600 in 6 weeks"" can sound demoralizing. But rather than giving up, he capitalized on what he was doing well and exploited it, making more trades and increasing his contract size. Now, of course, he is thrilled.
But the problem is that this growth takes time to realize. If you start with a profit target of $100, that may seem just like a dinner for two not the supplemental income most of us want. But as the profit target slowly grows to the equivalent of a washing machine, then to a trip to Las Vegas, and on and on, things get easier to stomach. But day trading profits start out small, and we have to be tough, to endure the slow start and resist the temptation to either make a huge risk or to give up altogether.
Slow increases are the way to successfully and consistently grow your trading account. Start increasing your position size slowly from 1 contract to 2 contracts. Make sure that you are still consistently profitable when trading 2 contracts. And then increase your position size from 2 to 3 contracts when you're ready. Go in single steps, and never ""jump"" from 2 to 4. Increasing the position size slowly will help your brain to adjust to increasing stop loss and profit amounts, without getting emotional, and it will also you maintain your consistency.
There is one and only secret to growing a trading account, and it is something that both I and my student have taken time to realize: patience."
Tuesday, August 7, 2018
The Art of Growing A Day Trading Account
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