As humans, we often find ourselves comparing actual dollar amounts to what we can accomplish with that money.
This way of thinking can and will(!) lead to negative outcomes, and here’s why.
If you choose to trade a small account, your expected returns should ideally be similar to those when trading a larger account. However, there are certain challenges associated with both small and large accounts that traders must deal with, which are mainly technical in nature, (such as execution, slipage, sizing, risk and other things)
This post will focus more on the psychological impacts and the realities of numbers. It’s important to remember that percentages drive the math behind trading, Not Dollars, as this perspective will significantly influence how we evaluate our gains and losses.
Trading the Money
How does generating a 5% return on a $100 account make you feel? It’s barely enough for a coffee at Starbucks. Now, imagine achieving the same 5% return on a $30,000 account with the same trade and risks involved.
This comparison highlights two critical aspects when considering a 5% return on different account sizes:
- On a $30,000 account, you make $1,500.
- On a $50 account, you make just $2.50.
In a perfect world, both trades would elicit the same emotional response and satisfaction regarding their financial outcomes. However, we don’t live in a perfect world. Instead, outcomes often translate to sentiments of “two bucks? What a waste of time” versus “fifteen hundred bucks? That covers my rent.”
On the flipside, when putting on both positions (6 Lots vs 0.01 lots) the feeling on how much this will cost you when the Stoploss is hit will be significantly different between those two accounts.
This is where the problem lies, as we tend to think not in terms of percentage gain (as both account have the same gain) but in terms of what we can do with the money.
This stark contrast reveals a significant problem: we tend to focus on dollar amounts rather than percentage gains, despite the fact that both accounts achieve the same percentage return. This mindset is further complicated by human psychology; when we incur losses, many—including myself—find it easier to accept substantial losses than to celebrate significant gains. This tendency adds yet another layer of complexity to the concept of “trading the money”
dealing with this psychological shortcoming in human nature properly gets you in the top 10 traders instantly! just keep in mind, this is much much harder than it sounds!
Expected returns
A lot (if not most) of the “trading gurus” advise things like, “risk 1% per trade.” This is not only terrible advice, but it also leads to unreasonably high expectations, assuming you know what you are doing and are not risking 1% for a 0.1% profit.
Risking 1% on a larger (swing) trade may be reasonable, but even then, it heavily depends on circumstances such as how many times you plan to scale in, whether you scale in while in profit or in a loss, where you enter (is there a positive expectation of a fakeout happening?), and so on. I could go on for pages discussing reasons and considerations to take into account.
If you have an average return of 2R (meaning your actual risk is half of the profits generated, regardless of where your stop loss is but based on the actual drawdown the position creates before becoming profitable (I will go deeper into this in another post), and assuming you trade intraday and make an average of 3 trades, that would mean you would risk 3% max intraday. So unless you are averaging a 6% return per day, you are trading too large and are on the waiting list for a catastrophic loss.
See the table below to outline the returns you “would have”, with proper position sizing and the guru-statements were remotely true.
| Deposit $ | Daily % | 7 Days | 30 Days | 60 Days | 90 Days | 180 Days | |
|---|---|---|---|---|---|---|---|
| 55 | 2 | 63.18 | 100 | 180 | 327 | 1943 | |
| 3 | 67.64 | 133 | 324 | 787 | 11248 | ||
| 5 | 77.39 | 238 | 1027 | 4440 | 358457 | ||
| 7 | 88.32 | 419 | 3187 | 24261 | 10701451 | ||
| 12500 | 0.3 | 12764.87 | 13675 | 14961 | 16368 | 21433 | |
| 2 | 14358.57 | 22642 | 41013 | 74289 | 441510 | ||
| 3 | 15373.42 | 30341 | 73645 | 178756 | 2556292 | ||
| 5 | 17588.76 | 54024 | 233490 | 1009130 | 81467398 | ||
| 7 | 20072.27 | 95153 | 724330 | 5513787 | 2432147986 |
Of course this list ignores losses, and is just to illustrate how much profit you “would be” making if those guru statements were just partially true.
Impossible? No! Realistic? ALSO NO! If things worked out that way, we’d all be billionaires by now, wouldn’t we?
i will go deeper into position sizing, scaling and hedging in future posts.
to keep track of things i will use the tag 50€
