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Monday, November 19, 2007

The first enemy of the small funded trader ...

If you try to start out trading with limited funds, you are stacking the deck against you. Why?

First of all, it's simple money management.

In order to see how 'good' or successful and profitable a system or method of trading is, you need at least a hundred trades. The more, the better. Why? Because at different times, the market will behave differently. Starting in 2001, we entered a bear market. So a method that performed well in 2001 in a bear market, may not have worked so well beginning in a sideways market; from 2002 to 2006. And naturally, it's easy to get a system to work in a bull market, such as has been enjoyed since 2006. But as the last 7 years prove? Markets change. Trends change. A sector that's hot today, is cold tommorow. Therefore, to thoroughly test out a method of trading you need at least one hundred trades.

Enters the problem for the small funded trader. He or she doesn't have enough money in his account to have one hundred trades. They'd be lucky to have enough in his account for 10. So he or she may begin to look to horrendous areas to trade with, since he has so little; such as .pk - pinkslip companies; and offer him no dividends. Not that there aren't good penny stocks out there. But do they thoroughly investigate penny stocks? Or simply buy a .pk stock because they "read" something about it on the internet? He or she leaves the realm of the investor and trader, and enters the world of the gambler. Worse yet, they believe it is impossible to start out small, and build wealth. They come to believe that you must start out with $300,000 to trade and invest with the big companies.

Nothing could be further from the truth. This is what I propose to demonstrate with the $500.00 Challenge. It is possible to start out with limited funds and build wealth by investing and trading. Provided you understand a few things.

1) Having limited funds is an automatic negative to your money management strategy. Therefore, you must use a method that looks to greatly limit risk, and is highly accurate.

2) You must be patient. My goal with the $500 Challenge Accounts is to get them to a sizeable amount ($300,000.00). In the beginning, there will be months with nothing going on.

3) You must add capital to your accounts on a regular basis. In the beginning, this should be at least $100.00 per month. This does not mean that you must trade or invest that capital. I'll get into why you shouldn't be trading or investing limited capital tommorow. But you must work to increase your capital so that you battle against point #1.

What is another enemy of the small funded trader and why does this limit trading and investing in the beginning? I'll get into that tomorrow.

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