How To Properly Build A Trading Account
“My basic principle is that you don't make decisions because they are easy; you don't make them because they are cheap; you don't make them because they're popular; you make them because they're right.” – Theodore Hesburgh
If I were to tell you that the next trade you take could make you rich, how would you feel?
My guess is that you’d be excited and eager to take that next trade (at least, that’s how I’d feel).
Interestingly enough, that’s how the trading industry is portrayed in pretty much everywhere you go.
A week ago, for instance, I was at a Toastmasters meeting in Hangzhou. I’ll leave out some of the details, but I mentioned to a few people I was involved in Forex trading. Their response was almost along the lines of “Wow, you must make a lot of money!”.
Do I? At least, I don’t consider myself making that much money, yet.
But I do know one thing…
How To Properly Build A Trading Account
As a matter of fact, there are 2 ways to make A LOT of money trading currencies.
- Risk a lot of money
- Properly build your trading account
Both ways work. The only problem is that option #1 is also associated with big losses and accounts blowing up.
Is that what you want?
To me, the decision is simple. I aim, first and foremost, to build my trading account in a proper way.
What’s really interesting, though, is that the nearly 80 traders interviewed on the Desire To Trade Podcast succeeded only that way (i.e. by risking less than 2% per trade and seeing trading as a cumulative activity).
The truth is, what you do today might matter much more than you think in a few years. Either you’ll have cumulated your gains in what will be a huge trading account, or you’ll have quit trading and/or lost everything.
My goal with this article was to discuss some of the essential components to build your trading account.
There are things that will prevent you from growing your account that you must pay close attention to. So let’s dive into that!
Here’s How To Start
There are two primary factors influencing how your trading account will grow in the beginning.
- The initial capital you put in
- The monthly return you produce
The lower the initial capital, the longer it will take to build your account. However, you can’t put all your money into Forex trading and expect things to go well. That’s a dumb idea.
Similarily, the lower the monthly return you can produce, the longer it will take for your account to grow. However, you can’t push your return to high, because that increases your chances of blowing up your account.
The initial capital you start with is 100% up to you, but I’d encourage you to increase that amount over time by adding money to your account as you follow your plan.
The monthly return you produce will be based on what you risk. To determine what you can risk per trade, I recommend you follow Brent Penfold’s advice by computing the Risk-Of-Ruin.
Some Things To Consider
Reduce Withdrawals To A Minimum
If you constantly withdraw money from your trading account, you are basically preventing it to grow.
The force that allows you to build your trading account is compounding. However, if you get back to your initial balance every year, you’ll have no opportunity to grow.
Compare, for instance, a trader who withdraw $50,000/year vs. a trader who withdraws only $20,000/year vs. a trader who withdraws nothing.
Starting balance: $50,000
Return (assumed constant): 5% per month / 60% a year
Trader 1’s balance (after 1 year): $80,000-$30,000 = $50,000
Trader 2’s balance (after 1 year): $80,000-$20,000 = $80,000
Trader 3’s balance (after 1 year): $80,000-$0 = $100,000
Trader 1’s balance (after 10 year) = $50,000
Trader 2’s balance (after 10 year): $1,865,853 (rounded)
Trader 3’s balance (after 10 year): $5,497,558 (rounded)
Trader 1’s return (in year 10) = $30,000
Trader 2’s return (in year 10): $707,195 (rounded)
Trader 3’s return (in year 10): $2,061,584 (rounded)
While, I agree that months and years aren’t always going to be positive, 5% per month is very achievable. It is usually the return I aim for with beginning traders going though my private coaching or the Desire To Trade Academy.
The goal of this isn’t to say that you shouldn’t withdraw from your trading account, but that withdrawals must be minimum is you truly want to build your trading account.
That might not apply to you, but a lot of people reading this are from countries where the cost of living is fairly high (i.e. United Kingdoms, United States, Canada, Singapore).
Bringing the cost of living down for a while might allow you for a while. Perhaps try to do some of your work remotely. On that note, a highly recommended book is the 4-Hour Work Week.
Try comparing the cost of living in your city with other cities around the globe and you might be surprised. Plus, traveling is fun!
So you might still be at the point where you trade demo or test your trading strategy. How does this apply to you?
Save this article somewhere and look back at it when you feel you want to risk a lot of money and aim for higher returns. You don’t need to.
Great achievements don’t happen in a day, but by doing the right thing to build your trading account, you’ll get to where you want to be in a controlled way.
Any question? Have you taken this concept into consideration before? What are you doing to build your trading account? Comment below or post in the Facebook group!