Why 2% is better than a poke in the eye.
Tuesday, February 23rd, 2010 Your Mental Game by TraderCiscoSometimes with trading we forget the little things. I’ve written before about how the little things can have a terrible effect on our trading careers.
You know like forgetting your wallet when you head out to the car, or the grocery list you leave on the table. Hopefully I’m not the only one that ever does that. You know the feeling when you are ‘there’ and left ‘it’ at home. Tonight I thought it was time to remind the traders who have been around awhile and to tell the newbies to not forget their 2%.
2% of what you may ask? 2% of your account. You see we traders let greed take over way too often, we let the emotion of the trade effect us to the point that we become blind to the potential that is available with just 2%. Let me prove it to you. Answer me this one question. Have you ever been up in a trade to the point that you have seen double digit returns only to not know what to do when it came time to close the trade? Have you ever chose to let it run just in case you might be able to pull down just a little bit more? I think we have all been there only to see it turn and take back the double digit return and give us a very small return if not fall all the way back to break even or negative.
So what about 2%? Well I use 2% to help you see that with a patient routine, and a true plan it doesn’t take much to build an account into a winner. Look at these numbers:
Starting Account size: $1000
% Increase per day: 2%
Trading Days a Year: 240
What do you think the account would be worth at this pace? It is only 2% just a pittance, nothing, a joke of a return. However, 2% is not a joke it is incredible when you see what compounding this over a full year of trading. You see $1000 becomes $121,025 in 240 trading days. I would tell you what 3% becomes but I don’t want to bore you…. How about $1,327,450. Yeah no joke.
So it is time to step back and realize that you need a plan and a recognition that your 2% return is worth it’s weight in gold. Don’t miss the opportunity to trade consistently and with purpose, by doing so your small account will grow greatly.
PS By the way, all of you that read this and your GREED kicks in high gear, check yourself, for compounding works in reverse too. Don’t start thinking falsely that you should risk higher percentages early on so that your $1000 can become $2000 quicker so that you can get to $1,000,000 even faster. That is a fool’s game. Money management deserves respect, without it you will fail.
Don’t fall victim to greed, allow yourself to recognize that compounding is as powerful as any trade you may execute, that is what will help you manage your losses and celebrate your wins.
TraderCisco
PPS A smart trader commented to me that we are not Goldman Sachs and we don’t make money everyday, and he is correct. (Thanks @fx_13) My point was not that we will never have a losing day, rather if we respect incremental growth, when we do have the double digit gains we will see this for what it is and gladly take the profits, recognizing that these will help propel us in our chosen direction of profitability.. If you have ever looked at a chart the first thing you note is that NOTHING moves in a straight line, however, when we see the value in what may seem to be an insignificant increase we will find growth of our account.