In this episode of Truth About FX, Walter talks about the rule of thumb in compounding your money. And what are these two rules that you should always keep in mind? According to Walter, there’s an easy trick that will let you identify your risk margin and some tools that will help you spread out to other platforms. And what is this one thing that you need to dig into before deciding on any broker. Find out more in this episode.
Download (Duration: 05:47 / 13.9 MB)
In This Episode:
00:35 – rule of thumb
01:43 – figure two things out
02:40 – 20-trade multiple
04:57 – maturing as a trader
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. Terri asked. He is making money trading and he has a trading account but he knows that it’s not a good idea to keep all your money in trading account. So what is the rule of thumb when it comes to putting money at a broker, pulling it out and stuff like that?
Walter: So Terri wants to compound his accounts. It’ll depend. What I would say is this. What you need to do is come up with a number of trades that you need to have sort of bank in your account so that you are able to withstand one a drawdown: a losing streak; and two, able to maintain the account if you have multiple trades open.
The way I’ll look at it is like this. Let’s say that on average, I take 4 trades a week and my trades last typically two weeks or something like that. You might say that I have on average maybe about 8 trades open at any given time.
Now, depending on my win rate, my losing streak is going to depend clearly on my win rate. So, my win rate is 80%. I’m probably not going to have a whole lot of 8 losing trades streaks but if my win rate is 25%, I may have a ton of 8 trades losing streaks.
What you need to do is figure those two things out and also, you need to look out how your broker calculates margin because they all have different levels where they actually just will liquidate all your trades as well.
You need to have all these in line and you need to know your risk. If you use fixed fractional and you risk 1% per trade, then you need to know that too. Let me give you an example. Let’s say that Terri has a 100,000 to trade and he doesn’t want to put all 100,000 with the broker or even if you would’ve break it up and have several brokers hold that money, which is completely understandable.
Let’s also say that Terri takes on average about 3 trades a week, wants to compound the money but doesn’t want to give all the money to the broker. Risks 1% per trade and has about 50% win rate.
Notice that the reward to risk ratio actually doesn’t come in here. I’m not going to even look at that. If that’s the case and his trades last about a week, if that’s the case Terri is probably going to get away with a 20 trade multiple.
This is what I mean by that. You take 20 trades and you multiply it by the risk per trade -which in this case if he is using fixed fractional, he’s using 1% per trade, that’s 20% of his account but he’s going to need to suck away.
The other 80% he can put in like a long term deposit or something like that even though I know it makes peanuts but it’s safe than it’s with the brokers. What you’d do is, “Okay, I’ve got this $20,000. I’m able to withstand 20 trades, basically which includes losing trades and open trades.”
All that is required for margin and then now what I’d do is I can actually eve split that up and give it to like 3 different brokers if you want or 2 different brokers so that you’re not all stuck with any broker.
Then they’ll say, “It gets tricky. Adding, entering the trades in 3 different brokers”. There are software tools and I’ll link them up in the show notes for you but there are software tools that you can use that will make all of that happen for you. You don’t have actually to put the trade in every single platform. It’ll do them all at once.
So that is how you get around that. That’s basically how I would look at it. In most cases, you’re going to know if you risk 2% per trade for example and you want to have 20 trade cushion and you’re going to have to take 40% of your money and put in there, assuming 1% per trade.
If you have let’s say that you risk 2% per trade and you have a 30 trade cushion and that means you’re going to take 60% of your money and put it there. So that’s kind of my rule of thumb. It may not work for everyone.
You really need to understand what the broker margin requirements are and how many trades are you going to have on the run at any given time. And how many losing trades are you going to have.
Obviously, when I say that you might have 8 losing trades in a row 80 times 1% is 8% that you need in there but it’s not actually that much because as your account depletes when you risk 1%, you’re risking less money than you did before when you lost 1%.
Obviously, it goes down like that but that doesn’t matter. The point is you needed to know about how many trades you need to have sucked into that account or those accounts so that you can withstand the losing streaks and so that you can keep all of the trades open at the same time.
So, that is basically how I would do it. I hope that makes sense. It’s a great question. It shows how you’re maturing as a trader when you start asking these questions because you understand the risk of the broker.
One of the biggest risk we have as retail forex traders is that our broker can do something crazy and we can lose all our money. Like that happens all the time to traders. They lose their money and technically it’s not their fault but if you split it amongst several brokers then you are better off that way. So, that’s what I would say.
Hugh: Great, that makes a lot of sense. Thanks, Walter.
Walter: Thanks, Hugh.