Let's say we have consistient profitable strategy and continiously gain some money. What should we do with the profits?
Some advisors say that we should always withdraw the profit (on a monthly, bi-weekly or weekly basis), leaving something extra on account for further trading.
Some others say that all gained profit should be immediately re-invested in the trading, continiously increasing the positions in a hope that small account eventually will grow to a million dollars pot.
First proposition seems to be very safe, as you secure your profits by cashing them, but your trading capital does not grow (or grows very little) and in this case a possible loss stripe would force you to deposit some money back to the account to maintain the needed minimum, which might be very inconvenient.
The second option (pyramiding) is also proven to be faulty. If you continiously trade your whole account, sooner or later a series of losses will occur which will drain out your money completely.
I want to give you a simple, but efficient strategy which has the advantages of both options above without their disadvantages. Additionly, it has a "safety" feature.
To use it, you'll have to make some calculations, but it worth it. I used it on my trading account and it helped me to avoid many mistakes and not only to keep my deposit safe, but to grow it.
First, let's define some terms we will be using in this article:
Initial Deposit (ID): The amount of money we used to open a trading account.
Locker (L): A virtual part of the account, where funds are "untouchable" but available.
Locker Percentage (LP): Some fixed value of per cents that we will be using in our calculations.
Funds Available (FA): An amount of funds currently available for the trading (ID minus L)
Let's say, that our initial values are:
ID = $10,000
L = $0
LP = 25 (%)
When we open an account, we virtually put the LP per cents of ID to the Locker:
L = ID * LP/100 = $2,500
FA = ID - L = $7,500
So when we start our trading we will be operating with the sum of $7,500 instead of $10,000. Of course, from the point of view of our Broker, we still have $10,000 on the account, so our available Margin will be based on the $10,000 value.
Let's say, that when our trading strategy opens a new position, it uses 25% of the available Margin for each position. Without this system, we would use 25% of $10,000 ($2,500) Margin value.
But, as we have virtual Margin of only $7,500, our position size should be calculated basing on 25% of that ($1,875).
OK, let's move further. If the position was closed with loss, we do nothing, as it was a loss and we took that risk.
But if the position was profitable, we move LP per cents of the profits to the Locker.
In other words, we "lock" 25% ot the profit and re-invest other 75%.
For example, if our position closed with $400 profit, we put $100 into the Locker.
Now, our Locker is $2,600 and FA is $7,800. Our available Margin increased, so our strategy will increase the next position size and, additionly, we secured a quarter of profits at the "untouchable" pocket.
How do we use the Locker further? Now we perform a weekly checkup.
- If the Locker grew up, we do nothing.
- If the Locker did not change, but the FA decreased (say, we had a loss this week), check if the FA dropped below it's initial value.
In our example, if at the end of the week FA is less than $7,500, we "transfer" the difference from the Locker to FA to maintain a $7,500 level (or less, if we have not enough money in the Locker).
It's important to understand that we do not feed the FA from the Locker after each loss! The Locker should be untouchable during the week and if the FA dropped, we just trade smaller lots.
Now what we do at the end of the month:
Again, it's a check up time and we perform the usual weekly check-up, as above, but additionly we see, if our FA is greater then our Initial Deposit (ID).
If Yes, then we withdraw from the account what was earned in the Locker.
In other words, if our FA is greater than $10,000, then we withdraw what's in the Locker that exceeds $2,500.
if FA > ID then AmountToWithdraw = L - ID * LP/100
And here's something else:
For the next month, we set the ID value to the current value of FA, because we start next month accounting with a new (bigger) amount of money.
new month's ID = current FA
As you can see, if we have a profitable strategy which calculates the trade lot sizes basing on the percentage of the available funds, such system will give us a cash each profitable month and will maintain an increasing trades.
It also works as a safety feature because, again, the Broker does not see the difference between our virtual FA and Locker, so the Locker back ups our trades by its Margin value.
Some advisors say that we should always withdraw the profit (on a monthly, bi-weekly or weekly basis), leaving something extra on account for further trading.
Some others say that all gained profit should be immediately re-invested in the trading, continiously increasing the positions in a hope that small account eventually will grow to a million dollars pot.
First proposition seems to be very safe, as you secure your profits by cashing them, but your trading capital does not grow (or grows very little) and in this case a possible loss stripe would force you to deposit some money back to the account to maintain the needed minimum, which might be very inconvenient.
The second option (pyramiding) is also proven to be faulty. If you continiously trade your whole account, sooner or later a series of losses will occur which will drain out your money completely.
I want to give you a simple, but efficient strategy which has the advantages of both options above without their disadvantages. Additionly, it has a "safety" feature.
To use it, you'll have to make some calculations, but it worth it. I used it on my trading account and it helped me to avoid many mistakes and not only to keep my deposit safe, but to grow it.
First, let's define some terms we will be using in this article:
Initial Deposit (ID): The amount of money we used to open a trading account.
Locker (L): A virtual part of the account, where funds are "untouchable" but available.
Locker Percentage (LP): Some fixed value of per cents that we will be using in our calculations.
Funds Available (FA): An amount of funds currently available for the trading (ID minus L)
Let's say, that our initial values are:
ID = $10,000
L = $0
LP = 25 (%)
When we open an account, we virtually put the LP per cents of ID to the Locker:
L = ID * LP/100 = $2,500
FA = ID - L = $7,500
So when we start our trading we will be operating with the sum of $7,500 instead of $10,000. Of course, from the point of view of our Broker, we still have $10,000 on the account, so our available Margin will be based on the $10,000 value.
Let's say, that when our trading strategy opens a new position, it uses 25% of the available Margin for each position. Without this system, we would use 25% of $10,000 ($2,500) Margin value.
But, as we have virtual Margin of only $7,500, our position size should be calculated basing on 25% of that ($1,875).
OK, let's move further. If the position was closed with loss, we do nothing, as it was a loss and we took that risk.
But if the position was profitable, we move LP per cents of the profits to the Locker.
In other words, we "lock" 25% ot the profit and re-invest other 75%.
For example, if our position closed with $400 profit, we put $100 into the Locker.
Now, our Locker is $2,600 and FA is $7,800. Our available Margin increased, so our strategy will increase the next position size and, additionly, we secured a quarter of profits at the "untouchable" pocket.
How do we use the Locker further? Now we perform a weekly checkup.
- If the Locker grew up, we do nothing.
- If the Locker did not change, but the FA decreased (say, we had a loss this week), check if the FA dropped below it's initial value.
In our example, if at the end of the week FA is less than $7,500, we "transfer" the difference from the Locker to FA to maintain a $7,500 level (or less, if we have not enough money in the Locker).
It's important to understand that we do not feed the FA from the Locker after each loss! The Locker should be untouchable during the week and if the FA dropped, we just trade smaller lots.
Now what we do at the end of the month:
Again, it's a check up time and we perform the usual weekly check-up, as above, but additionly we see, if our FA is greater then our Initial Deposit (ID).
If Yes, then we withdraw from the account what was earned in the Locker.
In other words, if our FA is greater than $10,000, then we withdraw what's in the Locker that exceeds $2,500.
if FA > ID then AmountToWithdraw = L - ID * LP/100
And here's something else:
For the next month, we set the ID value to the current value of FA, because we start next month accounting with a new (bigger) amount of money.
new month's ID = current FA
As you can see, if we have a profitable strategy which calculates the trade lot sizes basing on the percentage of the available funds, such system will give us a cash each profitable month and will maintain an increasing trades.
It also works as a safety feature because, again, the Broker does not see the difference between our virtual FA and Locker, so the Locker back ups our trades by its Margin value.