Everyone says you need a sizable account before even thinking about trading for a living. While I agree, as pressure to make a certain sizable return each month will mess with your decision making ability, the ways to actually acquire that account in the first place are many. One of these ways is smart but aggressive money management. There are quite a few ideas out there that make a lot of sense and if you possess something I like to call the spirit of research and exploration, especially in relation to mathematics and statistics, you will quickly find a few viable ways to grow a small account into a bigger one in a reasonable amount of time. The research process will even be quicker if you know how to handle Excel or Mathlab or other similar softwares. You just need some creativity.
Going live with your life savings without a proven track record is just as insane as trying to grow a small account into a big one with conventional risk management. We need to help ourselves. And yes, nothing is impossible. You just need to know the cornerstones of your strategy, which are risk to reward ratio and winrate, and then you can create a risk model around that performance. I will give you an example now of how a risk model could be created around a hypothetical strategy.
Let’s assume we have an average RRR of 1.2 and a winrate of around 60%, which is more than enough to gain massive returns over time. If we average 10 trades per week, we will win 6 out of these, making 6×1.2 = 7.2R, and lose 4 of them, leaving us with 3.2R per week or 12.8 per month (on average!). If 1R equals 1% of our bankroll, we can make 12.8% per month which is more than enough to run it up and live a nice life even with a 10.000 USD account. However, most of us a) cannot afford 10.000 USD, and b) does it even make sense to start with such a huge amount of money? For many of us, those are life savings. It’s insane to trade those. Why not start with 200$, an amount a lot of people can afford, run it up to 10k with aggressive money management and take some chances, and then cut down on risk and build a steady stream of income? There is no reason not to do it that way, unless you have 10.000 USD or more to spare (and you know you are profitable).
The higher your winrate, the more aggressive you can be in your money management, as variance will play out much quicker, and swings will be more predictable/less detrimental. Whatever strategy you trade, I would NEVER advice to go below 1:1RRR for any trade, because it’s simply really, really hard to cope with psychologically if you have to win more than one trade to make up for a previous loss.
Now you could use a software like Edgewonk or to extrapolate your performance into the future and subsequently you would see possible equity corridors of where you would likely end up if you kept trading this strategy while keeping the performance stable. You would also see possible drawdowns, updraws, losing streaks, winning streaks, and so on. You could then assign different risk profiles to your setups depending on their quality and decide on a maximum viable risk for you to deal with. This would certainly maximize your return while keeping your strategy the same, and this is something you should absolutely do with every strategy you trade. However, to boost a small account to a sizable sum, this is still not enough. You have to do something more unconventional.
What if I told you that you could absolutely bet 25% of your equity or more on a single trade? The important thing here is that you have to be able to bet the same amount on your next trade as well. So assuming we put 200$ into our trading account, and we risk 50$ on our first trade and we lose that one, we are left with 150$, but we still have to be able to bet 50$ on our next trade to be able to make up for our loss (or more) in one trade. This is possible with abusing leverage. Depending on our winrate, we want to have a buffer of the highest mathematically/historically possible losing streak. This is where it gets a bit more complicated.
First, we have to assess what leverage our broker offers. There are trustworthy brokers like IC Markets that offer 500:1 leverage, so let’s assume we have that much. This would allow us to maximally move 200$ x 500 = 100.000$ or 1 EUR/USD standard lot in Forex. So now we know our maximum possible position size – even though we would obviously receive a margin call within nanoseconds after opening the trade, if our broker allows us to open it in the first place. Next, we have to take a look at our stop losses, as the smaller they are, the higher leverage we will need. If we want to bet 50$ on a trade, our smallest possible stop can be 5 pips, as with one standard lot on the EURUSD with a USD account, every pip would be worth 10$ (we also have to take into account the costs of trading, of course, but for the sake of simplicity I will forfeit this here). So the bigger your stops in pips, the better, as we will need less leverage and thus have more room to play with. However, you have to take margin requirements into consideration as well.
Next, we have to look at our biggest possible losing streak. With a winrate of 60%, mathematically this would be around 6 trades (again, it is always great to have historical numbers to back you up as well, instead of only numbers from hypothetical simulations – if you had only one 6-trade losing streak over the last 100 trades, but you had two back to back 4-trade losing streaks, this is something to consider as well. The higher your winrate, the less chance of back to back losing streaks and thus the further you can push your money management). Losing 50$ six times is 300$ and would essentially bust our account, so we have to reduce a bit here. Let’s assume our stop loss will never be smaller than 10 pips. Risking 20$ per trade, or 10% of our equity, would give us enough buffer to lose 6x in a row and still be able to bet 20$ on the 7th trade, because the lot size to risk 20$ on 10pips is 0.2, or 20.000 USD, and 80×500 = 40.000 USD. We could even push it a bit further to 30$ per trade.
Now when we start out with 20$ per trade on 200$, we do not increase our trade size until we doubled our money, essentially decreasing our leverage each trade, and thus only exposing us to the biggest risk when we just started a new level. At reaching 400$, we would increase our betsize to 40$ per trade, at 800$ we would increase it to 80$, at 1.600$ to 160$, and so on. A more conservative approach would be to take out 200$ once you double up, restarting at 200$, and then pushing it to 800$, taking 400$ out, etc., in order to grant us two or more tries at one level in case we bust once. Utilizing a hedging strategy we could push our luck even further, as our floating margin is not a realized loss and thus we could risk 3×25% of our whole equity on one batch of trades or even more before the broker would margin call us. However, I won’t go into that here as many people do not have access to brokers that allow them to hedge.
Looking back at our initial performance, 60% winrate with 1.2 RRR and 10 trades per week, or around 12R per month, you would now be doubling your account roughly every 4 weeks while utilizing a risk management that is based on sound mathematical principles. Sure, you will bust an account or two, but there will be a run eventually and the positive variance will take you to new heights, you just have to ride it. You then have to cut down your risk and not become greedy, as a risk management like this will eventually of course blow up your account due to unforeseen circumstances and due to the fact that the eventual sheer account size will mess with your mind. But the chances that you will catch a nice upswing are more than realistic and you will only have risked 200$ to have a 10.000$ account in roughly 6 months, rather than risking your life savings. That is actually risk you CAN afford! And all of that happened with very, very conservative performance numbers. I know traders that do much better than 1.2RRR with a 60% winrate.
Important is that you understand that trading like this is not a long-term option. It is a bet with the odds in your favor that you are going to end up with a nice, large account. But you then have to absolutely cut risk down to avoid being crushed. I don’t want to know how it feels to run up 200$ to 20.000$ and then losing it all. And neither do you. Emotional capital is just as important as our bankroll, so preserve it. Set a goal of X dollars you want to reach, and once reached, cut down your risk dramatically, and gradually build your account from there while taking out money to live off of. What else do you need? Don’t be greedy.
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