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What do you think about this risk management technique?

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What do you think about this risk management technique?

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  #1 (permalink)
Fayettville, AR
Posts: 2 since Jun 2021
Thanks: 0 given, 1 received

I have a fairly solid strategy that is profitable but I have a serious problem with holding onto losers too long, over-leveraging myself and over-trading to recoup losses. I am still new at this and I deposited $400 into Tradovate just to play around with it and see if I could make anything/not blow it up. I did really damn well and got the account to $1,400 in 3 days. Felt extremely good about myself and ended up way over-leveraging. Held onto a loser today, kept dropping contracts just before auto-liquidation until I was down to 1 and then it got auto-liquidated... Lol. No surprise there that was insanely poor risk management and I thoroughly deserved that in hindsight.

So I want to take a little break, go back to paper and try again. But in all honesty I don't trust myself very much when the real dollars start flashing on my screen. So here's my idea: I'm gonna deposit a really small amount, like $600. Then every time I'm up a fair amount of money I'm going to close my position and withdraw. Say I decide $600. Every time my account hits $1,200 my hard rule is flatten and withdraw $600. I'm assuming there isn't an option for this to happen automatically which would be ideal, but I feel like I can stick to it. And my understanding is that once you click the withdraw button it takes it out of your account and it can't be easily reversed.

Does this sound stupid? I will be over-leveraging the $600, like no one should be buying 3-4 micros with a $600 account but I have money in the bank if something insane happens like a flash crash that turns my account negative before I get auto-liquidated. I'm also risking the $50 auto-liquidation fee but maybe that's a fair punishment. And the idea is that if I end up auto-liquidated, it will take 5+ days to get more money deposited (ideally out of the profits I've been continually withdrawing). Good time to sit out and think about what I've done.

I know that Tradovate and others have max drawdown and other safety features which I should probably start using as well. But my problem is also that I start trading too much money with too much risk. When my account was up at $1,400 I was like "yesss. Shit if I keep at this rate I'll have $20k in like two weeks." So I want my account small. Seeing the large account balance gives me undeserved confidence, and the balls to over-leverage. I'd rather have consistent profits with occasional "mini-blow ups". It would also start to feeling like a potential side job as well if I'm getting consistent "pay checks" in my bank account every so often.

My only concern is maybe Tradovate will ban me if I get auto-liquidated so many times so I'll have to look into that. Just wanting to get some thoughts on this idea.

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  #2 (permalink)
Hawesville, KY
Experience: Beginner
Platform: thinkorswim
Trading: NQ
Posts: 107 since Sep 2015
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Why start bad habits from the very beginning? Risk at most 2% of your account. You should trade 1 contract until you until you can trade 2 contracts and keep the risk at 2% of account. It is that simple. Now, it would be hard to trade a $600 account with a $12 stop, so my advice is to papertrade until you can open a decent size account.

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  #3 (permalink)
Fayettville, AR
Posts: 2 since Jun 2021
Thanks: 0 given, 1 received

58LesPaul View Post
Why start bad habits from the very beginning? Risk at most 2% of your account. You should trade 1 contract until you until you can trade 2 contracts and keep the risk at 2% of account. It is that simple. Now, it would be hard to trade a $600 account with a $12 stop, so my advice is to papertrade until you can open a decent size account.

I don't really understand what the bad habit would be in this case. On a large account, yeah 2% makes sense. But you're really gonna say that risking $13 a day is irresponsible trading? The thing is I don't want a decent size account. I could open up a decent sized account whenever I want so that's not the issue. This is more of a side hobby than anything for me at this point. I've paper traded for a very long time and it's not the same as trading with money from a psychology perspective at all, you can't expect everyone to be able to trade the same as they do on paper in a live account without practice. I'm very consistently profitable on paper and I could throw $20k into an account if I wanted to but would that really be the responsible thing to do if I have a tendency of getting emotional and chasing a loss? This idea is about locking in profits and limiting risk with a forced timeout if I get irrational, while still being able to trade with large enough profits/drawdowns to effect me emotionally and also make it somewhat worth my while. I definitely learned some lessons with my blowout. I was trading very well until my account got to $1,000+, that's when things went downhill. The beauty about having such a small account is that you CAN'T hold a loser trade and let yourself drawdown too much, broker won't let it happen no matter what even if you call them begging and pleading. A new deposit takes time and that's all there is to it.

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  #4 (permalink)
Eilat, Israel
Posts: 17 since Dec 2020
Thanks: 6 given, 37 received

Hi Martick,
Reading your post, I'd like to both respond directly to your suggestion, as well as comment on you situation.

As a direct response - yes, maintaining a small account and withdrawing profits regularly is a valid procedure to control risk and help avoid "spiraling out of control" situations. I personally do something similar for the exact reasons you posted, and I know of several good traders who use this process regularly. It's a matter of personal taste, but if it feels right for you - it's valid.

I would, however, avoid the habit of using an account TOO small, and using "bust out" as a stopping point. Your psychology should become accustomed to "normal" gains and losses, and should NOT be accustomed to regularly seeing you account drop dramatically from its original value (even if it's a small "absolute" sum). It seems that 600$ is way too small for what you are describing, even trading micros.

You're better off holding several times that figure, but having RIGID rules on halting trading should you lose more than some max limit per day or week - so that the numbers are equivalent to the losses you'd take on the 600$ account. Just as an example, you can have 3K in your account, have 100$ "circuit breakers" for the day, and a rule to halt trading for a substatial period should you ever hit a 600$ loss (=20%, not 100%, of your account). The losses are the same as you suggest, but the psych is more realistic and can be scaled up in the future. (P.S if you don't trust yourself to follow such rigid rules, stay away in the first place :-) )

But the main comment I wish to make is to your claiming to have a "fairly solid strategy that is profitable". I BEG TO DIFFER.
If you indeed had a "fairly solid strategy that is profitable", then:
* that strategy would have clear rules for cutting losses, so you wouldn't be "hanging on to losers too long".
* it would have clear position sizing rules so you wouldn't be "over-leveraging".
* it would have clear entry rules, so you wouldn't be "over-trading to recoup losses".

Which means you are in one of two situations - possibly both:
A. You have bits and pieces of a strategy you're playing around with, but not a "solid profitable strategy" that you thoroughly know and trust.
B. You aren't following your own rules.

Either way, the solution does NOT lie strictly in the "catastrophy limiting risk-control mechanism" but FIRST AND FOREMOST - GETTING A REAL COMPLETE STRATEGY AND LEARNING TO FOLLOW IT RELIGIOUSLY.

I fear your hobby-like attitude (by your own words) is not likely to result in becoming profitable.
Instead of "playing around with it", just get to work on writing your rules down (and not just entries: exits, stops, sizing, and much more) as to form a clear and complete strategy. If you have any gaps in the strategy - fill them. Then resolve and discipline yourself to follow it relentlessly, in every aspect of every single trade, always.

Do that, and you're much less likely to spiral out of control in the first place.

Good luck with your trading endeavor!

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  #5 (permalink)
Houston Texas
Experience: Intermediate
Platform: NinjaTrader
Trading: CL, YM, NQ, ES
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Posts: 329 since Mar 2016
Thanks: 287 given, 1,030 received

Totally agree with the post above by ZviTradingCoach. Once you develop a solid edge, with a written plan that has several solid setups that match your trading style, then you can obtain trading competency. But after that, you will continue to blow up accounts until you develop a solid mental trading plan.


Buy the book.

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