Let’s face it – we’re all in this for the big bucks. Whether we’re tinkering around with our demo accounts, or playing with a few dollars in our live accounts, it has never been far from our minds that our accounts are going to make it big in the future.
Unfortunately, many traders have difficulty taking the next step and trading bigger positions. Some find it hard to risk wiping out the small profits they’ve worked hard for in the last couple of months, while some just can’t stomach risking bigger positions.
Taking on more risk definitely has its perks. But be warned. While it can give you bigger wins, increasing your risk can just as easily magnify your losses and wipe out your entire account. To avoid the pitfalls of trading big, I’ve come up with three simple tips to guide you with increasing your risk.
1. Make sure you’re in the green
Don’t even think about increasing your risk if you’re not even consistently profitable with trading small. If you can’t successfully trade small positions, what makes you think you’re gonna have any luck trading bigger ones?
If you think and feel that you’re ready but your account is still in the red, concentrate on pulling it back in the green first. That’s what demo and small accounts are for anyway.
2. Take it slow and steady
Just as you wouldn’t rush to fighting elite world champions after just learning how to box, you shouldn’t rush yourself into increasing your trading size. You don’t want to bite off more than you can chew, do you?
Taking a gradual approach towards increasing your position sizes is the key to becoming comfortable with taking a larger risk. If you’re not completely comfortable with the amount of risk you’re taking, chances are, it’ll show on your account balance.
So rather than make one big leap, go for small, steady increases. It’s less likely to have an adverse effect on your trading mindset, and it’ll allow you to adjust to larger risks more smoothly.
3. Focus on percentages rather than dollar amounts
I’ll let you in on a little trading secret that’ll help you adjust to larger trading sizes: focus on percentages rather than dollar amounts.
Risking 1% on a $10,000 account is the same as risking $100. On the other hand, risking 1% on a $100,000 account is equivalent to risking $1,000. So you see, by risking the same percentage on a larger account, you’re basically trading larger.
It also helps to put profits and losses in the proper perspective when you focus on percentages. Losing 1% on a $100,000 account won’t feel too different from losing 1% on a $10,000 account. But when you put it in raw dollar terms ($1,000 versus $100), it’s a lot harder to stomach.
So there you have it, folks – three things to keep in mind as you take your risk up a notch. You should be able to transition to trading bigger positions without a hitch if you take it slow and steady, and focus on percentages rather than dollar amounts. But above all, don’t make the mistake of increasing your risk if you’re not yet consistently profitable trading small.