"Trade with money you can afford to lose" How ?

[ivorm]

I see this adage (or its equivalent "Don't trade with money you can't afford to lose") quoted everywhere - on this board, in books, etc.

Well, it might apply if you are trading part-time so that you can always replace the funds with money earned from your main job. But I don't see how you can do this if you're a full-time trader.

If you are trading full-time, then unless you can afford to live indefinitely without the need to earn any money at all - (in which case, why bother to trade anyway) - surely you must be trading with money you can't afford to lose.

Can anyone explain this ?

 

[boy]

Ive seen this subject discussed before somewhere, I think the saying "dont trade with etc...." probably started out as a legal disclaimer by somebody selling a trading system and has since been adopted by most as 'sound advice'.

If you want to trade for a living then it must be looked on like a business, so would you start a business with the attitude that I can afford the loss so 'it doesn't really matter'. - I think not.

 

[TWI]

If you cannot afford to lose the money, don't start trading for a living. You must have an "out" of the business, just as you must have an "out" of a trade. Best thing is to start small and build up slowly, if you cannot afford to lose your margin capital you will probably trade emotionally and it will end in disaster.
Of course "can't afford to lose" is a very subjective statement.

 

[darrenf]

I agree it is very subjective and fear of losing the money can create a psycological problem in trading.

However, playing devils advocate for a moment- if we are to treat trading as a serious business, and we are in business to make a profit sufficient to both take a reasonable income and create capital growth, then in any other business model, it is necessary to borrow substantial funds in order to get the business off the ground. If a trader has managed to grow a small pot of money succesfully on a consistent basis, ie proved that they can succeed in the business, would in not follow that if that person was a business minded individual, that it would be acceptable for them to borrow substantial funds to set them selves up as a trading bsiness? ie trading their own account for their own income and to grow capital?

I am not saying I would adovcate this, or even that it would be possible to get a business loan to do such a thing, but I would be interested to hear what people think about this or indeed if anyone has actually done it.

 

[TWI]

You make an interesting analogy and maybe you are correct but I trade for myself and never risked more money than I could afford to lose. I prefer it that way and would not encourage anybody to jump in the deep end until they know exactly what they are doing.
Often a traditional business requires the upfront investment to kick off and get to the point where the business generates a profit. God forbid that a trader invests the bulk of the capital learning to trade. Trading is a very different kind of business and should not be approached with both feet first but rather very gently, one toe at a time otherwise there will be even less space in the shop doorways at night.

 

[Buk]

phewww, 'can of worms' material here we come Darren!!....I guess it's all down to individual opinion. The 'usual' progression into this business for full timers generally comes via the p/t route, when experience & funds dictate. What appears as high risk to one, is merely normal/undue risk to another. As you say, business capital (whatever you're engaged in) has many demands (pers income/expenditure/emerg funding)....and the individual needs to have comfort zones inbuilt to sustain his progression & maintain consistancy.

Personally, I wouldn't borrow to trade, preferring to build steadily & gain market exposure whilst increasing experience. But then, each to their own!!....If someone has the ability & strength of conviction, coupled with experience & sound money management practices, then I guess the ultimate "business" decision rests with them.

Many folk are discouraged by 'outside funding' due to the horror stories associated with Financial Trading, and wary of the examples of bad money management/ill prepared trading strategies....in the end it boils down to what's inside your head & the strength of your convictions!!

 

[Zenda]

Full time traders that keep losing - to replensh funds - "Run a Seminar" - As many on this board try to do!.....

 

[darrenf]

Even bigger can of worms that one zenda!!!

I'd forgotten about this thread but now it's back again:-

Twalker

You make an interesting analogy and maybe you are correct but I trade for myself and never risked more money than I could afford to lose.

relating back to the original thread title, what do you actually consider as being able to afford to lose? ie if you were to lose your entire trading stake.

I don't expect you to tell us in £ an pence but is it:-

1. an amount you would be able to easily replace if you lost it all.
2. an amount you would not be able to instantly replace but would not affect your standard of living or other finances and you would still be able to pull together another smaller trading stake to continue trading for a living.
3. as above but would need to get a job
4. would not be able to replace it and would affect other finances and would have to get a job.
5. would really hurt and would struggle to keep your house.
6. would see you out on the streets.

At the moment, I would say I fall into category 2 but then I also have a job anyway. Also, as my capital grows (thats the plan anyway), it inevitably forms a larger portion of personal wealth and is likely to move further up the scale.

I would be interested to hear anyones views on this, particularly those that trade for a living and do not have a job to fall back on.

 

[donaldduke]

I doubt many people are rich enough that they can afford to
lose money, however,

Any good trading system will have drawdowns.. These are
typically in the range of 1% or 30% (depending on your system
and risk profile). Therefore you need to expect
a certain amount of money may be lost in the near future.
Of course you never know if you will encounter a drawdown
today or next month.. buy even the best traders have drawdown
periods..

If you cant afford to lose ie have drawdowns in your equity, you
shouldnt be trading..

 

[darrenf]

OK, I think the often quoted "don't trade with money you can't afford to lose" is aimed at the also often quoted "90% (or whatever) of traders wipe out their account in the first year" type statistic.

So for those of us that have come through this stage and have experienced a drawdown or two, do you have a certain level of drawdown where you stop trading and re evaluate your methods on the basis that you "can not afford to lose" more than a certain amount?

If so, should we even be concerned about losing the whole lot? I say this on the assumption that a good system/ money management is successfully being used.

I hadn't until now got a "stop and reflect" drawdown figure but I think if I ever got to 30%, something would be really wrong and it would be time to do this.

I can't imagaine I would ever lose the whole lot unless I went completely off the rails and disregarded every rule I've ever created?

 

[TWI]

1. an amount you would be able to easily replace if you lost it all.
2. an amount you would not be able to instantly replace but would not affect your standard of living or other finances and you would still be able to pull together another smaller trading stake to continue trading for a living.
3. as above but would need to get a job
4. would not be able to replace it and would affect other finances and would have to get a job.
5. would really hurt and would struggle to keep your house.
6. would see you out on the streets.
[\quote]

I fall into 2.
I think 3 is about as far as anybody should push it.

As for trading systems having drawdowns, these can be limited by the style of trading you employ. If you follow a mechanical system or are a trend follower you will have inherent drawdowns that can be quite substantial. These can be even greater for scale traders, I saw some people mortgage the house during the commodity bear markets.
Scalpers probably get the best profile. It is rare to have a losing month if you scalp well. I largely scalp but do a little trend following too, the former has not had a losing month for over 12 the latter is far more volatile.

 

[darrenf]

twalker

just to clarify, when you say category 2, would that be if you lost your whole trading capital or x% drawdown?

Darren

 

[donaldduke]

In trading you really dont need to borrow money in the form
of a loan, you can get upto 20:1 margin with futures ..
This is effectively the same as a getting loan, but without
paying interest, ofcourse if go the margin route you can get
wiped out quicker.. But if you trade in a way that will wipe you
out you really dont want to be borrowing money to be trading..

 

[TWI]

That would be if i lost my entire trading capital. I may consider 3 however if i did that cos it would mean I had been a real tosser

 

[BBB]

DD - Only a fool can afford to lose money! (re earlier post)

I think a lot of this is subjective and varies from person to another.

I know a guy from LIFFE who lost his stake, remortgaged his house, then lost that too! That was too much in my eyes (the first loss) - but not his!

 

[TWI]

I think there is a general perception that trading is an all or nothing game. It is not about sticking it all on black and hoping for the best. It is a gradual process of increasing risk. It should never be necessary to get to the point where you are staking "everything" on your position. It takes considerable time to build up to the point where you can even make a living from it. There is never a need to take unacceptable risk, as you improve and your equity grows you can afford to take bigger risks. Position size should always be correlated to your finances anything else is lack of discipline and likely to fail.

 

[Buk]

hear hear......that about sums it up nicely!!......

 

[TheBramble]

It is a gradual process of increasing risk.

Increasing risk isn't such a good idea IMO.

Maybe increasing absolute amount risked as your trading capital increases, but I would suggest keeping your risk at the same (very low!) percentage of your total capital at all times.

But then again, I am very risk averse and will probably never make a million in any one trade...

(but I will let you know when/if I do).

 

[TWI]

I have found that with confidence come not only increase in capital risk but also increase in risk on that capital. More about being better at what I was doing than anything else. As I learnt more about a particular markets characteristics and how to get out of positions so I found it is possible to comfortably increase risk. This is not something that has continued beyond a point but I find risking 5% of equity on a single trade is now an acceptable risk whereas in the beginning 1% was more than enough. I thin the most important thing is to never step out of your own persanal comfort zone.