All bad traders out there, fear not. There is a way for you to concentrate on improving your trading skills with full confidence that:
- bad trading will not blow your account and
- good trading will be handsomely rewarded.
Spoiler: It does have compounding in it, and parlay too.
Let’s start with definitions:
BASE - the account. The equity that is protected at all times.
STAKE - maximum risk for the current period. It’s the seed of growth.
COMPOUNDING - 2*2*2*2*0.5*2*0.5*0.5*0.5
PARLAY - putting all your wins at risk again. Very risky and costs you nothing.
Stake is a tiny portion of your Base. You don’t risk 100% stake. Good traders can risk 50%. Let’s say your base is $1000. Your stake is $30, or 3%. With compounding, given 10 net wins at 1:2 RR, your 3% is multiplied 1024 times. Your $30 becomes $30000.
At 1:2 RR net wins is easily calculated: it’s wins minus losses, because if you lose, you lose half, if you win, you win double. So a win neutralizes a loss.
The biggest caveat here: you have to be a good trader to pull this off. Let’s see what bad traders can do.
All traders, bad or good, have to earn the right to trade bigger lots.
EARN - to be deserving, by virtue of accomplishment. To make money through labor.
Some good traders are born overnight. They retire at 5 years old. The rest worked hard to get there. So shall we.
Back to our bases. The base is $1000, stake is $30. Let’s say there are 7 stages to good trading. Rockets have stages, right? So we divide our 50% by 7, getting 7.2%. How many consecutive losses (not net, mind you) to reduce $30 to $1, risking 7.2% ? 45! You need to lose 45 times in a row. I’m not saying it can’t be done. Technically, it’s dead simple: make your stop loss less than spread. Philosophically, using a conventional strategy, with discipline, and losing 45 times, not necessarily in a row, will be a great experience, making you grow as a person, and a trader. But you have to do it with discipline.
Ok, and how many trades will it take to increase $30 by 14.4%? One. 1. Uno. But you could get lucky on the first trade. Why not trade for a whole day and see what happens? Or place 10 trades. 5 trades? So if after 5 trades your $30 grew by 14.4%, you can increase your risk by 7.2%. That’s parlay. If after 5 trades your account grew by 7.2% again, then increase your risk by 7.2% again. You see, you’re earning your right to trade bigger, literally.
Ideally, after 35 trades, you can get to risk 50% of your stake, like a good trader. Who knows, maybe you are.
Here's one progression:
Risk 7.2%, aim to make 14.4%
Risk 14.4%, aim to make 21.6%
Risk 21.6%, aim to make 28.8%
Risk 28.8%, aim to make 36.0%
Risk 36.0%, aim to make 43.2%
Risk 43.2%, aim to make 50.4%
Risk 50%, aim to make 100,000%
I think the first stages are too easy compared to the last stage, and that doesn't prepare us for the final takeoff. This should be more like it: The risk% remains the same, but the aim is now always double. Which means by the final stage you'll have quite a bit of stake saved up.
Risk 7.2%, aim to make 14.4%
Risk 14.4%, aim to make 28.8%
Risk 21.6%, aim to make 43.2%
Risk 28.8%, aim to make 57.6%
Risk 36.0%, aim to make 72.0%
Risk 43.2%, aim to make 86.4%
Risk 50%, or whatever, you're a decent trader now, it's up to you.
At every stage, you risk your CURRENT stake size, not the $30 you started with. That makes a huge difference in psychology.
Remember, only STAKE is at risk, your BASE is safe.
Q&A
Q: What’s the point of Base if I can grow a stake of $30 to $30000?
A: Short answer: leverage and diversification. The bigger the account, the less leverage brokers will offer. So your Base will provide the leverage at later stages. In the beginning stages, base can be used for diversification into longer term strategies. Add winnings from your campaigns to your base, and then start another campaign. Example:
Base $1000, stake $30. Campaign winnings: $5000.
New base $6000, stake $180. Campaign winnings: $180000 (Jackpot).
New Base $186000, stake $5580…
References:
https://www.forexfactory.com/thread/...35#post6967135