The gains can accumulate quickly when a prop trader is using a strategy based on maximum leverage with limited account size. In order to preserve and build those gains, it’s important to remove them from the trading account according to a good plan.
As described in previous articles in this series, the high-leverage, low-balance strategies used by leading prop traders can be applied to multiple trading accounts using different systems, with each account capitalized by not more than a couple thousand dollars.
The amount in the account typically ranges between $1,000 to several thousand dollars. That way, there’s no psychological obstacle to using the max leverage on each trade.
Reduce the risks from drawdowns
When you have a winning system, profits pile up. It’s tempting to “let it ride” by using the same system to trade ever-bigger position sizes in the growing account.
However, when the entire capital is available in the trading account, it means that the capital is exposed to the inevitable system “blow up,” which typically causes a steep drawdown. Even if the trader escapes financial catastrophe, he or she may become so risk-averse afterward as to become indecisive and ineffective.
Pull money out each month
The smart way to avoid excessive drawdowns due to trading system “blow ups” is to pull money out of the account at the end of each successful month. That way, when a major drawdown occurs, it won’t take all your money, just the couple thousand dollars that you can afford to lose.
Successful prop traders like Shaun sweep the profits out of each winning trading account monthly and move them into a non-trading account, where they remain safe. So, each month the trading accounts open with their individual capitalization set at a given amount.
Pull out at least enough to cover one “blow up”
Once you’ve launched your forex system, you’ll want to think about earmarking enough money to cover at least one trading system failure. After you’ve secured that amount to be used for a recapitalization of your trading account, every subsequent gain is “free money,” at least in a psychological sense.
The first milestone is to pull enough money out of the trading account to cover at least one catastrophe. If you’ve been enjoying mostly winning months, next you should allocate 50% of your profits for high-risk systems.
You can’t lose what’s not at risk
Keep in mind: When a prop trader is using maximum leverage, the only money that’s safe is the money already pulled out of the trading account. Profits should be pulled from each winning trading account, each month.
When a prop trader wins consistently using high leverage with a limited-size account, the gains from relatively small individual trades may compound quickly. Profits gathered from the overflowing small trading accounts can compound into large sums, and it’s important to manage those profits effectively.
If you’d like to learn more about using maximum leverage to pull profits each month, just contact Shaun.
Not much content here; if you’re going to explain a technique for better money management, you need to explain it better including explaining how doing this affects position sizing.
If I’m risking 2% per trade, but sweep out profits monthly, I’m never going to get the benefit of getting to grow the account to trade larger amounts. Or am I supposed to still risk 2% of my total even though it’s not all at the broker and just crank up the leverage to make up for it?
You raise more questions than you answer.
Guess it depends on your goal. If your trading for income, then what Shaun is saying is correct, the funds in you account is your working capital and should be protected. However, if your goal is growth, then pulling your profit is not the way to go. If your system is good, let your profits ride and keep your trade size/risk proportionate to your account balance (typical compounding money management strategy).
Hey Joseph,
Thanks for weighing in.
HI Shawn,
I want the cost of a plugin for mt4 and fxcm marketscope that can tell me on the weekly, daily, 4hour and 1hour if price is above ichimoku cloud, tenkan and kijun. (buy) and sell as well
thanks
Hi Raymond,
Chris Zimmer will email you an estimate.
I am actually doing something in between; instead of sweeping all profits out of the trading account, I sweep 25% of the gains only, then out of it I leave 15% in this non-trading wallet and withdraw the remaining 10% for a living. In this manner, there is 15% disponible in case of a disaster still and my trading account is consistently growing. Another thing to bear in mind is that my lot sizes dont grow as fast as my equity grows; so the bigger my equity, the further it stays from the margin call.
Sounds like a good idea if your strategy fits the bill.
Preaching to the choir here, but the issue with short positions is obviously that the losses can exceed the account balance greatly. So just pulling the funds from the account does not really protect you from a drawdown or from loosing that money (however it does limit your position size and hence reduce your possible exposure). If you were caught by the recent CHF debacle 100% invested at full 400:1 leverage you would probably still have to come up with some big dollars even if they were not in your trading account.
That’s the whole point. How is the broker going to collect those dollars?