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Monday, January 28, 2008

Low Funded Challenge Accounts: What have we learned thus far?

Sharebuilder Balance: $130.77
optionsXpress Balance: $583.49
ING Orange Savings Balance: $2.06

I thought we'd take a second out, and take a look, just recap some lessons learned from the Challenge accounts since October 2007.

Lesson #1: Although you can gamble with $500, the simple math teaches us that $500 is too little money to invest or trade with. :smiles: We looked at investing, and with the numbers we had, decided on a ratio of 15 shares per $45 dollar stock. Which would require about $680.00 or so. And for trading, we need to make sure we're preserving our account capital, which usually means we can't trade more than 3% of our account. We technically went beyond 3% with the Sugar trade. But at the same time, we really didn't, because with the addition of funds due to rule #2 our account capital is still preserved (and higher) than when we began.

Lesson #2: If you are low-funded you must have a strategy that allows you to regularly add capital to your account. Period. This is my "rule #2", wherein I split up $100 to the accounts each month. This is absolutely vital for the low-funded trader and should really, be the first priority.

Lesson #3: Patience. This one we've learned a couple of ways. First of all, from October to December, we just spent that 3 months building up the accounts with capital. No trades. No investments. Just relying on rule #2 to build up capital.

Another way we've had to learn patience? Is letting trades pass by. For example. I was recently looking at the possibility of a Soybean trade for this account in the next couple of weeks. Where I might partake in this trade for my regular account? The risk is much too high for the low-funded account. So we have to patiently wait for a trade to line up with our risk tolerance, with the proper risk / reward ratio, etc.

That's ok though. Because of rule #2, while time is passing by, our account capital is increasing by another $100.00 in February.

When you are patiently awaiting a trade, something you will learn? There are always opportunties. They may not present themselves today, or right this second. But if we patiently wait for them to turn up? They will.

Lesson #4: Money Management principles and strategies. I'm not going to get out of a blog entry without saying those words. :smiles: Seriously though, it's not as much about my psychology, my methodology or my risk tolerance. If you have a verifiable good system, with good risk reward ratios, good Money Management numbers? That fits your psychology and risk tolerance? It's all about the money management. Not the system. And for the low-funded account, we have to view money management differently. How?

Again, it goes back to rule #2. For money management reasons you have to add capital to your account frequently.

* * *

Sharebuilder Balance: $130.77
optionsXpress Balance: $583.49
ING Orange Savings Balance: $2.06

Total Trades and Investments: 1
Largest Inter-trade Drawdown: $86.51
Consecutive Losing Trades (Drawdown): 1
Average Drawdown: $86.51
Accuracy Rate: N/A
Average Reward: $0.00
Risk Reward Ratio: N/A

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

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