How to manage your account risk
In this post, I'm discussing my system of account management, outlining how I pay myself and maintain a balance in my account while leveraging compounding for account growth. I believe the easiest way to illustrate the system is through an example.
Imagine you start with a 100k account. First, you'll define how much you want to risk per trade—let's say 1%, which equates to 1k per trade. Next, you'll set the account size at which you want to freeze your account, say 100k. Then, you need to establish a maximum loss for a day at a level you feel comfortable with, let's say 8k. So, 100k + 8k equals 108k.
Now that we have the parameters set i will go through several trades
You start with a 100k account and begin trading, risking 1% per trade. The progression is as follows: 101k → 103k → 106k → 104k → 109k. At this point, you are 1k above the 108k threshold defined earlier. You are now allowed to wire out 1k (note that the size above the 108k needs to be substantial for you, so 1-2k, as defined by you). Now, it's time to redefine the parameters again.
You start with a 100k account and trade, risking 1% per trade. The progression is as follows: 101k → 99k. You freezed your account at 100k. Now, you need to reduce your risk on your account, perhaps to 0.5% or lower (you define that), and continue compounding above 100k where you will risk 1% again.
This system has several advantages:
You will protect your downside by freezing at a certain level and reducing your risk.
You will pay yourself along the way, reducing emotions by covering your expenses.
You will find a balance between paying yourself and still making progress in compounding your account.
Normally, after periods of significant gains, performance may slightly diminish. However, with wiring out, you will secure these gains.
Note: You need to have strong discipline for this to work. You are not allowed to wire back into your account or let the size go substantially above your fixed amount (in this case, 108k). This System was inspired by @BrianLeeTrades on Twitter.
Thanks,
Finn