Turning A Small Account Into A Big One Part 2

The second article in this series is going to focus on a rather unconventional account building method I began using way back in the early days of my trading career.

The method I’m going to show you today may raise a few eyebrows from established traders who always propose that you should trade with a consistent risk size, but in my experience I know the only way to turn small trading accounts into big ones in a short space of time is by using unconventional methods and tactics not usually talked about in normal trading literature.

 

Probability

 

To understand how this method works I must first talk about probability.

If we were to have a trading strategy which gave us a 50-50 chance of making money on each trade would you know what sequence of wins and losses you would have ?

No, there’s absolutely no way to know.

But what we do know is at some point there are going to be times when we win multiple trades in a row and lose multiple trades in a row. We could have winning streaks where we make money on 7 consecutive trades and we could potentially encounter times when we lose money 3 or 4 trades in a row.

Even though its impossible for use to work out when these winning and losing streaks are going to happen if we know at some point they are guaranteed to happen it means we can use them to make a lot of money

This is the general idea the profit building strategy is based on.

For the method to work correctly we don’t need to go on massive winning streaks where we make profits on 10 trades in a row, in fact we only need to win on two consecutive trades in order to make good money.

Stake=1  means 100 pip movement makes you £100

Stake=2 means 100 pip movement makes you £200

The higher the leverage you use the smaller the distance the market has to move in order for you to make a lot of money.

To make £1000 trading at the lowest leverage available means you will have to win ten trades in a row without losing, whilst making £100 on each trade in the process.

This is equivalent to the market moving 100 pips ten times with you getting the direction right every single time.

It would be almost impossible for a new trader or even experienced trader to achieve this.

But I wonder how long it would take to make £1000 if you were placing trades at a leverage ten times bigger than the lowest leverage available ?

In other words, stake=10 for people using a spread betting broker.

This would mean the risk on each trade (assuming the distance of your stop from entry is 10 pips) would be £100.

The market would still have to move 100 pips but we would only need win on one trade to accomplish this compared with ten if we were trading at the lowest leverage available.

The main problem for most traders is they don’t have enough money in their account to consistently trade at this size, typically, I believe the average forex trader is trading forex with an account under £1000, now assuming their risking 1% of the account on each trade that means the maximum they should be losing is £10.

The method I’m going to share with you now does not require you to have thousands of pounds available in your trading account.

Even if you have as little as £200 in your trading account you will still be able to implement this account building strategy successfully.

The Method

 

The basic idea behind this strategy is when you make money on a trade you should increase the size of the next trade you plan to place.

Most traders do not do this, they always trade with the same leverage on every trade until they reach some sort of goal they’ve set themselves.

For example you may have £1200 in your trading account and you currently trade 1 micro lot on each trade, your target might be to reach £2000 before beginning to trade 2 micro lots, this is probably going to take a long time so to speed things up a bit you can try implementing my profit building method.

Skip the video below to the 34:38 mark and listen to what the former pit trader (basically day trader ) says about trading. BTW the video’s quite funny, the dudes a bit smashed.

Profit Building Example

Lets say you’ve been trading with 1 micro lot on each trade you place (if you’re using a spread betting broker like me this will be represented as stake =1 ) and you have just made £50 on your latest trade.

On the next trade instead of placing the trade at 1 micro lot you instead increase to 2 micro lots.

So now to make £50 on this new trade the market only has to move half the distance it did on your first trade.

First trade at 1 micro lot, market needed to move 50 pips to make £50

Second trade at 2 micro lots the market only needs to move 25 pips to make £50

Simple enough right ?

Important Guideline’s

 

Whoa now hold on a minute! there’s a few really important rules you need to know before you start using this method in your trading.

The first, and probably most important rule, is to always account for losses before increasing the size of your next trade.

This is best explained with another example.

Imagine you have lost your previous 3 trades and collectively the losses you’ve made total £30.

You place another trade, the market moves in your favor and you end up making £100, now you want to implement the method I’ve outlined to you and increase the size of the next trade you plan on placing.

However, before you work out how much to increase it by you must first take away your previous losses from your recent gains.

£100 – £30 = £70

£70 is the total amount you have to determine how much you risk on the next trade.

Important Note:

Make sure you always work this out before increasing size. By always accounting for losses beforehand your deliberately making sure not to trade in a reckless way which could harm your trading account, if you fail to account for your previous losses and end up losing on the trade which you increased the size of, you will not only need to make back the loss on that trade but also, the three other losses beforehand.

What I tend to do is take half of what I’ve made then place the next trade at that size.

In the example above the total after accounting for losses was £70, so the maximum amount you want to risk on your next trade is £35.

With £35 being the total we are willing to risk on our trade, the other £35 which we have left over we can keep as profit.

 

Stop Distance

 

Another thing that determines how much you can increase the trade by is the distance of the stop-loss from the entry.

If the distance of the stop is 10 pips that means, using the example above,  the total amount you can risk is 3 mini lots.

In a scenario where the stop-loss was 15 pips away from entry like in the image below, it would mean you should only place a trade at 2 mini lots which works out at £30 total risk, and you keep the remaining £40 as profit.

Aviary Photo_130943323056348331

Watch Out For News!

 

The final thing you must pay attention to when placing trades at an increased size is news events.

Big high impact news events can have the ability to cause slippage on your stop losses, meaning you could potentially lose more than what you originally anticipated.

Although this is quite rare (its only happened to me twice in many years of trading) it still has the potential to happen, so be sure to not place trades with increased size when any of the following news events get released.

Non Farm Payrolls/NFP – Usually have a major impact on the markets when released

FOMC Statement – Refrain from placing any trades at all during this one as things can get really messy in the markets.

Interest Rate Announcements – Just stay out the market completely with these.

The other news events should all be okay in terms of their impact on the market and any trades you may have placed, although some will have a red icon meaning their high impact, the effect they have on the market will not be enough to cause you slippage on your trades.

 

Summary

 

My goal with this two-part series was to give people real and genuine methods for building small accounts into big ones, although I think many people will find the method I’ve presented above controversial as it contradicts a lot of what traders have been told during their learning process, I feel as though if you follow the typical trading advice you will not really make any progress or advancement in your trading career.

One of the often repeated facts of trading is 95% of traders lose money consistently, while this figure many not be entirely correct (Oanda reported around 60% of their clients lose money) it still shows us the normal trading advice isn’t getting people the results they expect, if it was, a lot more people would be making money.

Thanks for reading, please leave any questions in the comment section below.

 

 

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