How to grow your trading account: Risk management tips when trading with a $50-$500 trading account.

In my last post, I wrote about some tips that can help you manage effectively a small trading account. In that post, I wrote on three things with most of the emphasis on delayed gratification and compound interest. You can read the post by clicking here. In today's post, I will be writing on arguably the most important thing needed to effectively manage a 50 to 500 dollar account. On this note, I welcome you to another edition of how to grow your trading account.

Growing a small trading account requires a lot of precision and accuracy when dealing with trades. You need to have adequate knowledge and some mental workup. I still say that for one to be successful in trading a trader must master the act of risk management and trading psychology after he has finished learning the academic part of trading. This, therefore, brings me to the meat of today's post. Risk management is the concept a trader should have full knowledge of before embarking on the journey of managing a small account.

What is Risk Management?

Risk management has to deal with the way risk is being controlled and avoided and how profit is made with respect to the risk. Every traders' goal is to reduce or totally avoid risk(No one wants to lose money). Avoiding risk initially is most times not possible. However, it can be controlled, minimized, and finally avoided. Personally, I feel risk management accounts for thirty-five percent of a trading strategy.

With risk management your funds might not grow fast but they will definitely not be blown away; So choose your evil

Here are some tips regarding risk management when trading a small account.

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1. Adopt the two percent rule in ALL your trades

The two percent rule is very common in investing and trading be it stock, bonds, or forex.
It states that

no trade should exceed two percent of your capital.

Some schools of thought like to use a range of 1-3% but I strictly advise that 2% should be used all through when trading with a small account. The importance of adopting this is it gives more room for traders to think straight without having emotions attached to the trade. Secondly, you will most likely not receive a margin call if you follow the two percent rule.

2. Have a maximum drawdown.

Having a maximum drawdown requires a lot of discipline because there is this urge to fight the market when you consecutively lose a trade. This is not meant to be so instead when you lose consecutively, you should probably take time off the screen and maybe go hang out with friends and later come back to reevaluate your strategy. A drawdown refers to the amount you have to lose consecutively to stop trading for a while in the market. For me, I feel three consecutive losses or a 6% reduction in my capital is e sign that I should stop trading. Most people don't implement this tip and this is why most accounts are blown. One of the reasons they give is bad luck and all sort of excuses. I will like to end this second tip with a quote from a famous footballer Ronaldinho

Losers always have excuses.

Quit giving excuses and take control of your trades. Remember the market is never wrong.

3. It's good to have winning trades but the risk to reward ratio is more important when it comes to increasing your equity.

I was talking to a friend some months ago as to why I prefer forex to binary options trading and I must say that my major reason stems from the fact that most times the risk to reward ratio in binary options is around 1: 0.8. This means that if you risk one dollar you would be getting 0.8 dollars as your reward.
when managing a small account, your risk should always be less than your reward. Personally, my ideal risk to reward ratio is two. This risk to reward ratio gives room for losing trades. Since no one knows the direction of the market, it is safer to use a ratio that allows you to gain even with a 50% winning rate for trades.

I think this will be all from me for now. I will continue with more tips in my next post. Please feel free to drop a comment and add your own tip.