When I started my trading career in 2005, I was hired by a firm to trade their capital. Needless to say they didn’t just give me a few million and let me trade my heart out. The opposite occurred. I was allowed to trade only the absolute smallest position possible. Since I was trading the stock market, that equated to 100 shares of a relatively slow moving stock. I was only allowed to lose about $3 to $5 per trade, and my maximum loss for the day was $20 (they didn’t count commissions when you were starting out).
At time I didn’t love the model because I thought it would take a long time to start making money, my tune quickly changed though. If I could do well on a small amount of capital I could do well with a large amount of capital, I just had to prove that I could do it…both to myself and the firm.
The system worked like this. I was allowed to trade 100 shares of stock the first day I started trading (after training) and was allowed to lose $20 a day. If trading binary options this would be equivalent to risking $3 or $4 per trade and if you lose $20 you are done for the day.
I had to make at least a few trades a day, and if I was profitable I was allowed to trade 200 shares and my daily stop went up to $30. If I finished the day down I dropped back to trading 100 shares with the $20 stop. If I was profitable I got to trade 300 shares and had a $40 stop.
The basic premise is that you are only allowed to increase your position size and daily stop loss if your trading warrants it.
Begin trading with the absolute minimum amount possible and then build from there…if you are profitable. With European binary options that may mean only risking $1 per trade. In forex you can open a micro and risk $1 or $2 per trade. With stocks you are limited to trading 100 shares which in a slow moving stock keeps risk to under a few dollars.
Many new traders scoff at the idea, but if you can’t make money trading a small amount, you will lose your shirt trading bigger positions.
By increasing your position size when you have a profitable day, once you gain some consistency your positions size will grow very quickly.
This “level system” doesn’t need to last forever. Set a goal for yourself. Say you make $3000 in a month on this system, then you are allowed to come off the level system and you can just trade your standard position based on your account size.
What should your standard position size be? It will depend on your account. Risk less than 1% of your account on each trade (2% maximum); so if you have a $25,000 account your maximum risk on a trade is $250. If you have a $500 account you risk up to $5 per trade.
Therefore, when you are trading live for the first time, you’ll actually be risking much less than 1%.
Start out trading the smallest increment possible–maybe that is risking $1 on a European binary trade. If you are profitable for the day (having made at least a few trades) move up to $2 the next day. If you are profitable increase to $3 the next; if you lose money drop back to trading $2.
This method keeps you from losing most of your capital while you are in the learning stages. You aren’t going to make or lose much, but once you gain consistency your position size can go quickly and you can start making some serious money by risking 1 or 2% of your capital on a trade.
There is a compulsion to make a lot of money quickly, but that doesn’t work if you want to become a consistently profitable trader. Start out small and increase your position size only if you are profitable. The goal is to eventually increase your position size so you can risk 1 or 2% of your account on a trade. It will take time to get to that level though. Once you have built up your position size via consistently profitable trading, continue to risk 1 or 2% of your account and take yourself off the level system. If you are away from trading for a long time or hit a bad slump it can sometimes help to go back on the level system. Start at the smallest position size, and build your confidence with small winning trades.