There’s a dangerous disease that’s been plaguing hopeful traders for a long time now.
It’s a serious issue that nobody really wants to talk about.
Traders simply don’t want to hear it.
So what is it?
A lot of traders think they can make millions, (or at least tens or hundreds of thousands of dollars), with a small trading account.
The formula is simple.
Open a trading account with a few thousand dollars. Make a “killing” in the markets (trading Forex micro-lots or penny stocks!). Buy a Lamborghini. Trade from the beach. Party with hot babes.
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Yes, some traders think they can do this.
But of course, they can NOT.
The math of trading is pretty simple:
If you want to make 6-figures per year, you’d better start with a 6-figure account – AT LEAST.
Or even 7 figures.
And if you only have a 4 or 5-figure account, it’s unrealistic to expect more than a 4 or 5-figure result.
I know the majority of traders don’t want to hear this.
Holding onto naive dreams is so much easier.
But if you want to make your trading a SERIOUS business, you need to be SERIOUS about capitalization. And you need to have some REASONABLE expectation of results. (It’s OK to start with a small trading account and build it up over time, as long as your expectations are realistic).
Look at real estates developers as an example to compare your trading expectation.
They put in millions, and according to Investopedia, make on average a +6.1% to +7.5% return over the long-term!
Now, you can certainly make a much better annual return in trading, as the source above suggests.
And with the right portfolio and trading strategies you can make more than the average return of the S&P 500 index. (My hedge fund has beaten the S&P 500 convincingly this year, as I shared in the most recent Breakout Strategies Masterclass coaching lesson).
But, to build a serious trading business you can live of, or that can provide a stable secondary income, you need to make sure:
- Your trading capital is big enough for your desired outcome,
- Your trading capital is the right size for the portfolio you want to trade.
Undercapitalization is one of the most dangerous aspects of almost any business – including trading.
Working with traders of all levels for almost 10 years, I’ve witnessed more than enough cases of traders burying their trading dreams because of undercapitalization.
Deep, painful drawdowns they couldn’t handle. Sleepless nights. Non-stop stress. Embarrassing margin calls from their brokers. Being forced to switch off trading systems they’d spent a long time building. And having to explain their trading failures to their partners.
RIP trading dreams!
So, once you create your desired portfolio, it’s vital you determine the correct account size for that portfolio. (Which is one of the things I explain in detail in the Breakout Strategies Masterclass).
If your account size is too small for the portfolio, you need to restructure the portfolio or increase your trading capital.
In each case, the wrong capitalization could put you in the traders’ graveyard.
Capitalize properly and it’ll be another step in the right direction for your serious, long-term trading business.
Tomas & Andrew
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