Yes, absolutely. There are a couple of important things for you to make money trading.
First, you have to have a set of profitable rules. If you don’t have profitable rules, you won’t make money—end of the story.
Second, once you’ve got a set of profitable rules and you must have the confidence to keep following them. A couple of things can shake your confidence, either you don’t trust the rules, not comfortable with the level of fluctuation, volatility, and risk in dollar terms, or don’t understand how the rules work and what’s happening.
If you don’t trust the rules, you can build confidence by testing them on the historical data and say, “Ah, okay, if I’d followed these rules, this is what would’ve happened, and if I changed the rules a bit, this is what would’ve happened. So the rules as they are, are better than the rules changed.” Or you can optimize and improve them and make the rules even better so they make more money, you build the confidence in the rules by testing.
The confidence or comfort with the volatility of your account is about your risk profile and risk tolerance. You have to ask yourself if how much money are you willing to risk to still sleep well at night and not get stressed out?
On day one, that might be a small amount, and it might be a much bigger amount in six months or a year, but this is what’s right for you.
There are two parts to it: the dollar fluctuations and the percentage fluctuations. So if you have an account and make some money, then your account drops 10%, are you comfortable? Probably. If you make some money and the account drops 60%, are you comfortable? Probably not. If it drops 20%, are you comfortable? Maybe. If it drops 40%, are you comfortable? Most probably yes or no, so it depends on you and on your risk tolerance.
In the System Trader Launchpad course, where we do the drawdown tolerance, that’s the exercise to go back to. Look at how far can the account dip, and still feel confident with it as a percentage of the account value.
The second part is how far it can dip in dollar terms and be comfortable. The percentage is one thing, but you say you’re comfortable with a 10% drop in your account. But if you had 50,000 US dollars that you suddenly came across and put into your account, then it dropped 10%, that’s $5,000. So you have to think about the percent drop and the dollar drop that you are willing to tolerate, combine them, and that tells you how big the account should be on day one. Then over time, you can scale it up.
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