Three Big Reasons Small Trading Accounts Fail
June 15, 2009
I get and have frequently seen on trading discussion sites the question “How much do I need to trade for a living?”, or some variation thereof. Brett Steenbarger recently posted on the subject. His post addresses a couple of key points that I have also commented on in this blog previously (see Trading for a Living vs Trading for Wealth Building, among others).
One of the major points Brett and I both make is how you need to do the math and figure out what kind of returns you will have to make to reach your objectives. When you do that you’ll quickly start to understand the extremely high level of acheivement required to trade for a living with a small starting balance. It’s just not realistic. I’ve said on several occassions that a six-figure account is really required.
Brett also mentions a figure that is often bandied about among traders – the % of new traders who blow up. What you will hear varies. In this case, a broker contact of Brett’s indicated that more than 80% flamed out well within a year of getting started, and that the rate rises as the starting account balance is reduced. In other words, the smaller the initial account the higher the odds of failure are.
Here are the three biggest reasons why small accounts fail at a higher rate:
- Wrong Mindset: Because of the small amount of money involved, they think of it as a hobby or Vegas type of thing where it’s at least as much about entertainment as about generating returns.
- Too Much Risk: They trade too big, often because they are thinking too much in terms of nominal results (dollars earned, etc.) rather than relative results (% return).
- High Transaction Costs: The smaller your account the higher the relative cost of commissions, meaning the higher the required returns to get beyond break-even (this is less an issue in forex).
Of course there are other reasons why traders fail, but these three as the main ones which impact small account traders.
Addendum: Trader Mike has a good post on the subject.
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