Today’s article is on handling accounts. Did you ever wonder whether to trade a demo when starting your Forex career? Or when to withdraw profits? This week’s focus is on account management so sit tight as we discuss these elements and more.
PROCESS DURING A FOREX CAREER
Let’s start with the very beginning and move on from there. Remember, our number one goal is always to make sure that we abide by our risk management rules to protect our trading capital and make sure we can trade the next day. If you follow the below mentioned step by step guide, traders might actually avoid blowing-up their first account.
At the beginning of one’s Forex career or anytime Forex traders develop a new strategy, traders must open up a demo account and should avoid trading with a real money account. The reason is very simple: at the start of one’s career or with any new strategy, traders should be focused on learning how the market/strategy works and understanding the price patterns and internal workings. Traders must test which strategies, tools, indicators, risk management, money management, and trade management match their trading psychology.
This experiment phase is important for the trader to develop a trading plan that is in sync with one’s own views. With real money on the line traders are not able to test various concepts and the foundation of their plan is immediately on shaky grounds. It is desirable to open 2 or more demo accounts to test various concepts.
As soon as a trader is more firm about the direction of the trading plan, one can move on to opening up a tiny practice account with real money. Preferably a trader has a small track record of their trading plan on demo at that point. If not, a tiny account can still be worth it as a method to “get the feet wet”. Trading with real money, even though with small amounts, adds a different dimension for starting traders. Although testing a strategy works fine with a demo account, when adding with real money to the mix the importance of trading psychology (fear, hope, greed, patience, discipline) becomes apparent.
The tiny account should be a small fraction of the total risk capital. A trader can still keep the various demo accounts to practice with, however the tiny account should preferably be used to test only 1 strategy. Avoid using the tiny account for wide-spread testing (use demo), for gambling or practicing (use demo), for taking trades not related to the strategy (use demo), etc. Remember this account is to test the strategy and trading plan and our implementation of it (how our trading psychology handles it). We need to prove we have the discipline and patience to implement our plan correctly before moving on.
As soon as a tiny account has proven to be successful over a period of roughly a quarter of a year, a trader can think of the next step. At this point the trading plan should be fairly complete, although a couple of lingering elements can still be decided in this phase. Also an evaluation of one’s trading and strategy is vital to provide critical feedback. Be aware that the increase in risk capital can always bring along disturbances with one’s trading psychology. Demo accounts can always be maintained for practicing purposes.
After a sufficient experience with practicing one’s account, traders can start their career with the intended trading / risk capital they had in mind. What is sufficient? This depends on many factors such as intensity of trading, performance statistics, statistical analysis, level of discretion, length of trading, time frames used for trading, number of trades taken, back testing completed, etc. Traders can always keep their demo accounts for testing purposes. In this phase the trader must have a very solid trading plan and changes to it should be irregular. In this phase a trader must be decently confident that they can avoid blowing up their account. Losing one’s risk capital is still survivable when trading on a demo, tiny or small account, but once (almost) the entire risk capital is used, this cannot occur.
The more experience a trader has, the more likely it is that the trader could be trading 2 or more strategies. Trading the strategies separately per account or deciding to trade all of the strategies on one account are both equally valid concepts (just make sure to keep track of it). Traders can always keep their demo accounts for testing purposes. In fact in this phase, some traders even have an extra tiny account which is treated either as:
- A practice account with small risk. The goal of the account is test and break even.
- A growth account with high risk. The goal is the account is high risk, high return.
No matter what choice a trader makes, it’s vital to keep statistics of each strategy performance separate.
When a trader reaches the stage of trading a normal or multiple accounts, other decisions need to be made. Let’s review them now.
Splitting the risk capital among 2 or more brokers is a method of diversifying risk. A trader could trader strategy WYZ at broker A; and strategy DEF at broker B, for instance.
Risk capital as margin
The trader needs to use an amount of risk capital that allows the trader to have sufficient margin with a good comfort zone / safety net. This margin capital level must be able to handle some drawdown before adding risk capital as needed. Excessive risk capital can be kept on a normal savings bank account (instead of used as margin), but avoid getting close to a margin call.
Upon arrival of the profits, traders can choose to remove the funds. This can be done after reaching a certain pre-determined goal / target. This can be treated as income or added to the risk capital to increase the size of the trading account (compound). Another option could be to choose for a mixture of income and account growth.
In case of losses, the margin account must be sufficient to meet the needs of the strategy traded. If this is not the case, then risk capital from the normal savings bank account must be used to meet the margin requirements plus safety net.
Did this article help with organizing your account management? Let us know down below if you have any tips or tricks?
Thanks for sharing this article and wish you many pips and Happy Trading!
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