So, if you will have a small account, then you have to exploit the ninth wonder of the world.
But first, let’s take a step back. What’s the ninth wonder of the world?
Slightly,
What’s the eighth wonder of the world?
The 9th Wonder of the World
The eighth wonder of the world is what Albert Einstein has said:
“Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it.” – Albert Einstein
Taking this a step further, that is what I call the ninth wonder of the world is something that I term alone.
Let me walk you thru an example.
Let’s say you will have a trading account, you begin off with $1,000, you plan to grow the account for the subsequent 30 years, at a median annual return of about 20% a 12 months.
Your strategy does a median of about 20% a 12 months.
After 30 years, your account will probably be value about $237,000.
As you recognize, inflation is pretty done higher. Considering inflation, this isn’t really a number of money anymore.
What else are you able to do? You’ll be able to do just a few things.
You increase the duration of your compounding effect, as a substitute of compounding for the subsequent 30 years, you compound for the subsequent 200 years.
Well, that’s all positive, right?
The issue is you will have to spend that cash in heaven whilst you sing Hallelujah!!!
In order that option is clearly not too feasible.
What about increasing your annual return every year?
Perhaps as a substitute of aiming for a 20% annual return, you’re in 400%?
That’s possible.
But the issue is in the event you were to do this, you’d likely should tackle the next risk to earn that higher return, and also you likely risk blowing up your entire trading account.
That’s something we don’t want.
What’s left?
The sector called “Annual Addition”
What if we added an additional $1,000 to our account every year?
For instance:
Every month you save like an additional 80 or $90.
Also, every year you could find an additional $1,000 in your account, How much of an impact would that make in your account?
You’ll be able to see that we start off with $1,000, and add an additional $1,000 every year to grow for the subsequent three years at this annual return of 20%.
After three years, your account is value…
$1.6 million.
Are you able to see how powerful that is?
By the best way, you didn’t make many changes you don’t need, you didn’t use a special strategy, you didn’t compound your returns for an extended time frame, and also you didn’t increase the chance that you simply’re taking to trade your account.
The one thing that you simply did is so as to add in an additional $1,000/12 months and you will have greater than 7x your initial return.
$1,655,634,20
This idea may be very powerful, no matter the dimensions of the account that you simply’re trading.
To sum it up, to use the ninth wonder of the world, you should recurrently add funds to your account so you possibly can compound your returns faster.
Now I would like to share with you something.
The Chinese Bamboo Tree
What you’re seeing immediately is a Chinese bamboo tree.
To grow a Chinese bamboo tree, you have to put the seeds in the bottom, water them, fertilize them give it sunlight to grow.
Imagine you do that for a full 12 months, guess how much your bamboo tree has grown?
Well, nothing remains to be flat in the bottom, nothing comes up from the bottom after one 12 months of you recognize, religiously, planting the seeds, putting water, sunlight, etc.
You do that again for the second 12 months in spite of everything, you recognize, it’s a superb physical workout.
Within the third 12 months, again, nothing comes up from the bottom.
By then this habit of yours really inculcated into you.
You proceed doing this on your tree within the fourth 12 months, and still, nothing comes out of the bottom after 4 grueling years of watering your bamboo seeds in the bottom.
At this point, you’re probably considering…
“Man, did the seeds die?”
You’re probably having a number of doubts about yourself.
Now, the fifth 12 months comes along…
Abruptly, inside six weeks, the bamboo tree grows up 30 meters, which is about 80 feet in six weeks.
Now the query is that this?
Did a bamboo tree grow 80 feet in six weeks?
Or was the little tree actually growing underground to develop a root system to construct a robust foundation to support this potential so it could grow outward within the fifth 12 months and beyond?
I believe you’ve got the reply.
The explanation why I’m sharing this story with you is since it’s the identical for trading in your earliest.
It’s meant so that you can construct your foundation to make all of the mistakes that you may make to instill that discipline to search out a trading strategy that works for you.
This fashion, once you will have a robust foundation, you possibly can then reap the rewards for the later years to come back.
Does this make sense?
Think when it comes to percentage
The subsequent tip that I actually have for you is to think when it comes to percentages.
Imagine you will have a $1,000 trading account, and also you grow it by 20% for the 12 months, which is about $200 a 12 months.
Now, I do know lots of you will probably be considering,
“Man, Rayner a lot work for just $200 a 12 months, I can’t even buy milk powder for my kids Rayner. Man!!! Rayner, I work at McDonald’s, and I’ll make even more cash”
Guess what? You’re absolutely right.
Working at McDonald’s will probably earn you greater than $200 a 12 months.
But here’s the thing…
Working at McDonald’s will not be scalable.
What do I mean by that?
In trading, you grow your account size to $10,000 and 20% return on a $10,000 account that will probably be value about $2,000 of profits in a given 12 months.
What in the event you take things even further, let’s say your account size is now $1,000,000.00.
A 20% Return on $1,000,000.00 is value $200,000 of profits in a 12 months.
Do you recognize what number of blissful meals you possibly can buy with $200,000?
Here’s the thing,
I would like you to think when it comes to percentage.
Not the dollars.
Since it gives you a more objective view of your performance.
Plus, it makes you’re feeling higher, especially if you’re coping with a small trading account.
Sounds good.
Honor your stop loss
Now, the subsequent thing I would like you to do is to honor your stop loss.
This is very important because, on a small trading account, your losses when it comes to dollars can really seem insignificant.
Example:
Let’s say you will have a $500 trading account and also you risk 2% on each trade. Theoretically, each loss that you simply incur, is not going to cost you greater than $10.
Imagine as the value reaches your stop loss level, and also you’re down $10, you would possibly think to yourself
“Add a small amount of cash, I can’t afford to lose it.”
You hold on to your losses, and even worse, you average into your losses.
The $10 loss now becomes a $20 loss.
You proceed holding on to your losses.
Now the $20 loss becomes a $50 loss at this point where you average even further into your losses.
The market continues to go against you.
That $50 loss has snowballed right into a $300 loss.
Before we realize it, you’ve now lost 60% of your account on only one single trade.
That is all since you refuse to honor your stop loss, you refuse to chop your loss if you’re very insignificant at the beginning.
Here’s the thing, in case your losses get too big, you would possibly reach a degree of no return.
That is what we call the “Risk of Damage.”
Let me explain.
The Risk of Damage
If you happen to take a look at this table over here:
If you happen to lose 10% of your account, you wish a return of about 11.11% to get back to interrupt even.
If you happen to lose 50% of your account, you wish a return of 100% to get back to breakeven.
And after all, if you reached a drawdown of 70% – 80% or 90%. That is where the returns get really ridiculous simply to get back to breakeven.
That is what we call “The Risk of Damage”
The purpose of no return.
If you should avoid the chance of destroy, you have to honor your stop loss.
Yes, I do know that this loss can seem small and insignificant, but you continue to must honor it.
Your good habits start now when your account is small, right?
Not afterward if you’re trading a six-figure to seven-figure account where you make mistakes like that is going to cost you quite a bit more.
Consistent motion = consistent results
I do know this sounds a bit bit you recognize, vague.
Let me provide you with an example so that you understand how this works.
Imagine your trades.
The end result of the subsequent few trades is something like this:
LOSE-LOSE-LOSE-WIN-WIN-WIN-WIN
Let’s say you’re trading a proven trading system and you’re following your rules and as you possibly can see.
Your first three trades are losers.
You’re feeling really bad
“Three trading losses, Argh these suck”
When the fourth trade comes you select to skip it due to the recent losses that you simply had.
You think that
“Oh, man, you recognize, that is prone to be a losing trade as well, let me skip the trade”
Well, guess what?
It seems to be a winner over here.
Then your fifth trade comes along, again, you select to skip the trip due to the recent losses that you will have encountered.
The pain remains to be very raw.
“So let me skip the trade again”
Seems to be a winner.
“What? What? What the F**K!!!”
So then comes the subsequent trading opportunity, now you’re stuck.
You’re considering…
“Man, should I follow my trading rules or skip the trade?”
But since the recent losses are still an excessive amount of to bear, you select to let your emotions take over and skip the trade.
Then guess what?
One other winning trade that you simply missed?
“No, God, please. No…No….”
At this point, you possibly can’t take it anymore…
“Arrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrgh”
You made the choice to follow your trading strategy because if not, you would possibly miss out on further gains.
You select to take the subsequent trade that comes along.
Finally, you caught this winner over here.
LOSE-LOSE-LOSE-WIN-WIN-WIN-WIN
Nevertheless, in the event you look back, your winner will not be enough to cover your losses, the three losses that you simply had earlier.
If you happen to take a look at this, from a big-picture standpoint, in the event you had followed your rules, you’d haven’t come up profitable, since you had 4 winners over here, in comparison with your earlier losses that you simply had earlier.
4 winners against three losers, you’d have made money over this series of trades.
But since you didn’t follow your rules, due to emotions, because your actions weren’t consistent.
That’s why you didn’t get consistent results.
You’ll be able to see that if you should be a consistently profitable trader, you have to have “A Consistent Set of Actions”
Every time the setup presents itself, you will have to take it.
You’ll be able to’t second guess yourself, or possibly that’s going to be a loser.
Because guess what, in the event you find yourself skipping trades, your results is not going to be consistent because your actions will not be consistent.
By now you possibly can see how essential it’s to be consistent together with your motion.
But let’s start off because you have to even have a trading strategy that works.
If not right, imagine this…
You’re consistent together with your actions, but you’re using a trading strategy that doesn’t work.
Guess what happens?
Well, your results will still be consistent.
But you will probably be continually losing here.
It’s essential to have a trading strategy that works.
Conclusion
Here’s the reality:
Growing a small trading account is tough.
Why?
Since it’s easy to treat it as “gambling” or “play” money.
Nevertheless, by embodying the concepts I’ve shared with you today…
You’ll have the ability to adopt the identical traits as an expert trader who manages billions of dollars of funds.
Nonetheless, here’s what you’ve learned for today’s guide:
- By utilizing the “ninth wonder of the world” you quadruple your returns without changing your strategy by consistently adding funds to your account
- Considering when it comes to percentage helps you detach yourself from the end result and attaches you to the method
- It all the time pays to maintain the chance of destroy in mind, so all the time honor your stop loss, because it’s the crucial consider methods to grow a small trading account
So…
What do you think that?
Will you begin trading as soon as possible with a small account?
Or do you want to attend a bit longer until you will have more funds to start out trading?
Let me know your thoughts within the comments below!