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parura

Account Size Importance

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I was wondering one thing..

 

1. Assume I have trading account size $10.000. This is 30% of my savings I have ($30.000). I will risk 2% each trade ($200). My max drawdown is 30%. Once this level is reached I will stop trading. It tells me system or trader need change, right? Once I am confident again I have to re-build my account size (i.e. by saving regular income or adding from savings account). So I lost 30% - $3.000. I am done for some time trading (if ever again)

 

2. Assume I have $3.000 trading account and $27.000 left on savings account. Same system with $200 risk each trade (this time it would be 6% - very risky). I say my max drawdown this time is 100% (or near)!!! WOW!!!. Assume I lost the account and to trade again I need new $3.000

 

In both cases I lost the same amount - $3.000. Both cases I lost 10% of my savings.

Now....beside psychological aspect (100% vs 30%) is there a difference?

 

PS: I intentionally assumed the same amount of savings because otherwise it would matter how much you lost ($3.000 may be all the savings you had)

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Difference is #1 could bleed a slow death and #2 could be a swift and quick take down.

 

It comes down to what your system has shown in backtesting and forward testing. A $200 stop is not huge, but also can be plenty if managed properly.

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Another book to read would be Ryan Jones, the Trading Game.

 

Says the book blurb:

The Trading Game shows you how to harness the power of money management for any trading method. "The goal of most futures traders is to make a million dollars as fast and as painlessly as possible....

 

-fs

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Bringing the matter I was thinking how do you manage your account in terms of "how much of an account do you keep at brokerage account". What I was thinking of is to keep 5% of account size at broker account and 95% at my bank. These could have 2 advantages:

1. You gain interest rate

2. You are disabled to do stupid things like risking more than 5% (at least to the moment you make a transfer but that might be enough to think things over and cool down)

 

Now, is it a good idea or not(why)?

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