Profitable Trading: Defining Your Trading Float

In defining your money management rules in order to start trading, the first step should be deciding on your trading float. This is the amount of money you have to trade with. Before you set the exact amount, it is important to define your objectives in trading.

You need to be clear on the amount of time you have available to spend trading. Can you trade full-time, part-time, or do you have hardly any time to trade, perhaps because of work and family commitments. Next, work out how much capital you have to trade with. There will of course be times when you will experience a loss. Are you comfortable with a loss of 30%, 40%?

What annual rate of return do you want? You need to be realistic about this. How much profit do you want to make over what period of time? This amount will be dependent on the amount of risk you are prepared to take. How do you want to take your money from the market? Do you want a cash flow (that is, consistently taking profits out) or capital growth (by growing your capital in the market, using the wonder of compound interest)?

Remember that money made from trading is not a reliable source of income. Some months, yes, you will make a profit, even maybe a good profit but at other times you need to accept that there will be a string of losses. It is a good idea for the first two years of trading not to focus on your return on investment. Rather, concentrate on refining your trading system and developing good trading habits. You will in this way be putting in the ground work for future trading success.

The bigger the trading float you start with, the easier it will be for you to trade. This is because there are certain fixed costs involved in trading. The biggest cost is brokerage. Many brokers charge a fixed fee for every trade and the traders with the larger fund size will find this easier to cope with.

Let us say two traders open a trade each. One trader’s position is valued at $2000 and the second trader’s position is worth $20,000. Both traders have identical brokerage fees which are $100 per trade. The trader with the larger account size has an advantage over the other, as he only has to make 0.5% in order to break even. The other has to make 5% before he breaks even. It is imperative therefore that the trader with the smaller position be more successful, which places him under greater stress.

There is of course nothing wrong with starting out with a smaller float, but you will be at a greater disadvantage than someone with a more sizable amount.

To begin defining your money management rules, think about the objectives you are aiming for in trading. Once you have crystallized these objectives, you will be in a position to consider the size of the float you are going to operate with. This is a key aspect of your money management rules and should be given due consideration before you start trading.

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