Withdraw or re-invest?

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.

I ALWAYS withdrawal "realized" profits when my base account size (1000.) doubles. Usually within 30 days. I would rather re-fund my account than risk not being able to remove a large win. We all know how shifty our Brokers can get. If I dont expose them to a large account, maybe they might not notice me?

I think having multiple accounts will be a good way to go, too. After building up each account to a good trading size, I can take regular withdrawals from each one. Individual accounts don't need to be so big, but their aggregate may be. Prevents the potential to "overtrade" with any one broker & take too much money from them, too. If one broker goes belly up, or even is having temporary platform problems, etc, the other accounts redundancy offers some degree of safety.

MM in itself can't provide a winning edge, so how an individual proceeds is entirely up to them. The key is to fully understand, and feel comfortable with, the worst case scenarios that could potentially result from the MM that one is using.

Consistent fixed frac sizing has its flaws (e.g. it requires a 25% gain to recover from 20% drawdown), but I've yet to discover anything better.

I can't see how 'locking up' funds within the account provides any kind of mathematical advantage. At the end of the day, the risk on every trade can always be represented as a percentage of total trading capital. Hence, varying the 'locked' amount is really only varying the 'real' position size. If, for whatever reason, sizing is not consistent, then one is counting on the fact that the bigger positions will coincide with winning trades, which may or may not turn out to be the case; an additional unnecessary complication/risk.

My approach is, or at least has been, this......... I allocate an amount of money that I can afford to lose, which is my trading capital. I place enough of this in the broker account to cover my anticipated margin requirement, plus a safety margin, and hold the rest in reserve, in a separate on-call account. The latter helps to insure me against the possibility that I'm unable (due to broker insolvency, or fraud) to later withdraw money from the broker account; and I can always wire more funds quickly, either way, if necessary. If the on-call account pays interest, then that's a further bonus. All position sizes are a fixed percent of the total capital (broker + on-call account).

Good points; and there can be other benefits in having accounts with multiple brokers. A friend of mine (who, like me, lives in New Zealand) has accounts with different brokers, denominated in NZD and USD, respectively. When the NZDUSD was up at 80c some time back, he shifted money to his USD-denominated account, and used it for trading. When the NZDUSD fell below 50c, he moved the money back again, making a handsome profit on the transaction, so that now he's trading from his NZD-denominated account. I guess that's a kind of forex within forex!

I like to trade the same size until I reach the next level, where I'll add size. Once I get to that level, next is the halway point to the next level. And at this point, now with a nice cushion, I will start taking profits for a couple weeks. After I am satisfied, I'll try to push account to the next level.

Why make all these calculations? The odds of losing it all, if you have an edge AND use good MM, are statistically negligible (unless you trade for like millions -probably much more- of years).

There's no need to worry about it. I'm yet to see any trader that lost all his account while having the above.


edit: by good MM i mean not risking more than 2% of the acc on each trade.

Plenty of 'Edged' traders blew accounts during the sharp decline over 2007/09. Im sure they all had an edge and great MM until then.

Only have in your trading account an amount that

A) you are mentally prepared to loose
B) enough to cover your margins
C) not enough for your broker to buy a yacht when it decides to go belly up and pay itself first

The risk of holding large quantities of money in a brokers account mixed with the risk of trading can be daunting, besides the money in the brokers account is doing nothing for you interest wise and 9 times out of 10 if your trading only 2% risk on a trade or a maximum 5-10% risk on a collection of trades then you really dont need to house 100% of your funds with them, more likely 25% at most.

The rest sits in an account that earns some interest. NOW interest on a small account means very little and in todays climate interest rates are small and bank fees usually gobble up the interest anyways, but later down the track, if you do join the million club (even 100K would be nice) then the interest earned can be enough. Holding more than 100K of YOUR money with a broker is a waste. 20-25K should be enough to cover your 2% risk, the other 75K is safe and can be called upon if you need it down the track.

Just my thoughts

Razor

That's because they didn't adapt their trading to the changing market conditions. They lost their edge before they lost their accounts.

O I agree with that. No need to hold one's entire capital in a broker's account.

Excellent point, totally agree.

That's because they didn't adapt their trading to the changing market conditions. They lost their edge before they lost their accounts.


I know traders that have traded the same method for the past 2 decades, it has a definate edge. One could argue either side of the above.

After 7-8 years of trading the same way and making great money along the way you could say that your method has a definable edge. The trouble is that after so long how could one admit that there system just suddenly lost its edge (a trending system incapable or change). Once this happens some traders will either trade it into oblivion and then some and others may step back, re analyse and come up with something new.

The problem is in the duration of success and our emotional inability to see the changes for what they are. Unless we have been trading a live system for that long in the same monotoneous fashion we cannot tell how we would react. Rationale thoughts now tell us that we would step back but even after the fact hindsight also tells us the same picture. If your bias has been directional and your method is to buy the dips (as in the bull run for most of the last decade) then dependant on the success you would not have read much different in the crash. You would like any other day of the year bought the dips. Your rationale mind is not always with you when your in the zone, and there are countless examples not only in trading.

Throughout history there have been major booms, and spectacular busts. Some make money off both sides of the coin, whether your methods and MM have enough of an edge to do the same will take time in itself and that is something no one can rush and no one can predict.

Take care

Razor