Two ways to protect your account from you.

There is something to be said about starting over.  Many people have lost their fortunes and rebuilt. We have all done destructive things to our accounts. Maybe it is ego, bad luck, too much risk, or self destructive behavior. But first thing’s first, you have to build something first.

Below is how to save you from yourself, how to build your account.

Budget 

If you are intraday trading futures, every firm has different margin requirements, but it is possible to do it with less than 20k.  If you are new don’t put all of it in your account. If it is easy to access you will access it. If you have never traded before only deposit 10%, you are going to lose it anyways. You might turn 2k into 4k but you will eventually lose that too.  It happens to every person I have ever talked to, the difference is some blow out with 10% of what they have to risk and some do it with 100%. Blowouts are a rite of passage. Blowing your hard earn money isn’t.

You should also have a daily limit.  If your broker won’t let you have one, change brokers. If you can’t find one send me an email and I can recommend a few. You tell them to lockout your account if you lose x amount.  Obviously, you can call them that day and ask them to change it but at least it forces you to stop at that moment. NOTE:  Most will prevent you from taking another trade but does not limit the risk in the current trade that causes the daily limit to be hit.

The point is to extend your time at the trading desk.  Budgets do this by making it harder to risk everything you have in one day or week.  It forces your stop and realize what has happened. We have all been up really good on the day and end limit down, don’t do it with your whole account.

Pros:

  • You extend your career.

Cons:

  • By opening an account with a smaller balance you might be limited by who will give you an account and your commissions will be higher.
  • There are days when you reach your limit down and the next trade makes a majority of it back. This happens very few times but it will stick in your head.

PNL psychology chart.fw

Pay yourself

When you make money, order the money from your account.  Get in the habit of paying yourself. Note the difference between paying yourself and spending it.  One of the things the old pit guys would do is once they made 100k they would put it into a CD.  The benefit of paying yourself is two fold.  One it gives you something to look forward to and is something tangible.  No one likes to work for nothing and at least at the end of the week/month/quarter, assuming you are profitable, you have something to show for it. It is one of the stupid psychological tricks but it helpful.  Once again, just because it is there does not mean you won’t need it.

Pros:

  • Something to look forward to.

Cons:

  • You might have to redeposit the money after a bad week and there is usually a lag each way if you can’t go to your brokers office.
  • Too many transactions might trigger Bank Secrecy Act.

Conclusion

These are rational steps to take and at a distance it is very obvious. However, when you start you have no idea of the downside.  Downside is an afterthought.  Climbing out of holes is part of trading.  Burying yourself alive is not. If you do things right, you should be a better trader tomorrow than you were today.

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