When a new trader is in the process of building their capital for a trading account there are a few financial mistakes that they make that can really keep them from having the ability to ever build the necessary trading account to even be able to trade with in the first place. Here are some personal financial decisions that can really keep you from building yourself some substantial capital to trade with.
- Almost all traders have a career as a business owner or employee before they become a trader with a large account or trade for a living. It is crucial that a trader work very hard at something initially and build value there so they can get paid enough money for their work to have the ability to save some of it. If you can’t even be a top notch employee first and learn some valuable lessons then you have little chance of being your own boss as a trader.
- I have seen so many people buy a house where they want to live and then commute by car to where they have to work. The expense of gasoline can be a huge drain on your personal finances if you have a long commute while you are an employee. If it is possible it is very beneficial to live as close as you can to your job so you don’t burn all your potential trading capital in your gas tank.
- For traders picking your life partner can have the biggest impact on your ability to ever trade. If you do not have a supportive spouse then you will not be able to trade, if you have a spend thrift spouse they will convert your profits into consumer goods quicker than you can make them. If you have a spouse that loves continuous drama you will not have the energy to trade.
- You have to resist the urge to spend your trading capital when it is small so it will be around to compound. I know of many people when they were young that when changing jobs they cashed out their tax deferred accounts and took the penalty hit and tax hit then spent it when they were relatively young. I told them that they could turn that 5 figure account into a six figure account given enough years of compounded returns but they spent it. They ate their seeds and now have no crop to harvest all these years later. You have to leave your capital alone and let it grow for many years.
- If you ignore the 1% maximum trading capital lost per trade then you will blow up your small accounts over an over. If you think that the 1% rule is too small and you want to risk losing more than that per trade then the problem is not with the rule it is due to the fact that your account is just too small and your account needs to get big enough where the rule gives you a meaningful amount of capital to risk. (The rule is to not lose more than 1% of your trading capital on a trade if you are wrong by the proper placement of stops, it does not refer to trading with only 1% of your capital, unless you are trading options then it might make sense as a position size You can trade large position sizes just keep your stops tight).
Getting to a meaningful amount of capital to trade with means we have to make a long string of good decisions to get there. Most traders have already proven their ability to manage their mind, money, and methods to build their trading capital to begin with most that come into their capital too easily don’t keep it for very long trading.