Although I am very interested in the trading universe, I have been burned enough times to know how one’s emotions can literally blow up one’s account in a very short period of time. When one is primarily using short-term strategies which lean more towards the trading universe instead of investing, emotions tend to get involved at a far larger scale. The reasoning is understandable. You could literally double your capital in the space of a few weeks. Every uptick in your positions becomes vital. You get married to your P&L numbers especially when adjustments need to be done on a regular basis.
Some traders live off this adrenaline while others don't. However, even the best traders have had down years and this is where I want traders to key into what I am saying. You imagine putting in 8 hours a day every day the market is open in one year and losing money. Not only is your P&L down but the time you invested into the year is now long and gone. There is a better way for you to do this which we go into below.
Although I don't agree with day trading one's capital, there is a right way to trade the financial markets but strict rules must be adhered to at all times. The most important question you must have answered before you go anywhere near managing a portfolio is how much of your portfolio is for short-term trading strategies. For example, in a typical $100k portfolio, I would only trade short-term strategies with 10%, invest maybe 70% of the capital in long-term positions and have 20% in cash at all times collecting interest.
Warren Buffett once said that it is far easier to make 50% from a $10k capital base than 50% from a base of $10 million. This stands to reason because you are risking far more capital with the $10 million portfolio which means your emotions will not let you use the same strategies as you would in the smaller account. This really is the issue plaguing short-term traders every day. Their size is killing them because they refuse to take account of the leverage they take on (risk) when they only lever up on short-term trading strategies in their brokerage accounts.
What I recommend is you stick to the ratios mentioned above no matter how well you may be trading at any given moment in time. The lion's share of your capital must be in long-term investments and not short-term strategies where all your broker wants is for you to continue to run up the number of contracts you trade in every position. Being ruthless with position sizing ensures emotions will be left firmly out of your trading and you can continue to compound your profits into long-term fundamentally sound dividend companies.
Why do traders continue to blow out their accounts on a regular basis? Well, the short-term trading industry easily attracts hordes of new participants every year because of the potential returns it offers. It is not uncommon for a trader for example to make a 50% return off the capital they put to work (More common for it to be marketed though) in a certain trade. When annualized, this return dwarfs the types of returns you see from long-term investing but again, not all the truth is being told here.
Earning a 50% return on your capital in one month may be possible with short-term trading strategies but highly unlikely (as discussed above) in a large account. Suffice it to say, a 10% annualized return on $10 million (Long-term investing) remains a superior return to a 50% return on $1 million of capital (Short-Term Trading Strategies).
Therefore, to get this show started, I will put capital to work in a $100k portfolio where I will adhere to the ratios I have alluded to above. By trading really small, the goal is to keep emotions out of the equation which is key (The best traders are unemotional and follow a system to the letter). Positions will begin to ramp up shortly. Join us.