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Another approach for determining your daily loss limit is to consider how much you are willing to invest in attempting this business. Is it worth 20,000 to have a go at becoming a profitable trader? Is it worth 50,000? Only you can answer that question, but it is an important, if difficult, question. The ambition to become a successful trader is similar to the ambition to become a successful sports player. It requires money, commitment, time, energy and more, but there is no guarantee of success. It is not like becoming a dentist say, which also requires the above, but where there is (almost) a guarantee of success. Knowing that there is no guarantee of success, you have to come up with a figure that will give you a reasonable chance of learning this business, but that won't jeopardize your life should you not succeed. Your investment is not only money of course, but also time. How much time are you willing to dedicate to pursuing your ambition to trade? Bob decides to commit to full time trading; he has enough living money to cover six months and an extra 20,000 of capital to invest in his trading career. Dividing 20,000 into six months, Bob has about 3300 each month. Assuming costs of around 300 a month for data, charting and Internet access, he has 3000 of risk capital each month. Dividing this into four weeks he has 750 of risk capital each week, or 150 per day. An appropriate plan might be to risk 200 each day, so each time he is down 200 in the day he quits for the day. If he loses 4 days in a row, he quits for the week with a loss of 800. If he has 3 weeks in a row losing 800 he takes one 80 week off. So the worst result for any 4-week period will be a loss of 2400. As there are six 4-week periods in six months, the worst result Bob can achieve is a loss of 14,400. This way Bob is assured of being able to trade for the full six months, giving himself the opportunity to develop the necessary skills. |
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