The Key Principle To Growing A Small Trading Account - Timothy Sykes

This is of course one of the exceptions but the goal is to get a base target as a percentage for compounding.  

http://www.timothysykes.com/2013/06/trading-and-compounding-or-why-a-winning-short-term-trading-strategy-wins-out/

The Key Principle To Growing A Small Trading Account

This is a great guest post from a recently new student of mine and it exemplifies the way I turned $12k into $3+ million and how my top trading challenge student Tim Grittani has turned a few thousand bucks into over $630,000 now in just 2 years:

If you start with $1000 and make 1% per day while compounding it would take you 2-3 years to get above $1M. It would only take you 2 full years, but the markets are
not open on weekends or holidays. That kind of consistency is tough to do and 1% at the beginning might not even cover transaction costs. However, it does illustrate how it is more important to have a winning trade strategy rather than scoring that one big trade.
Winning More Than Losing
Even a 60% success rate is a solid way to start building your trading account. Measuring success is always tricky, because it is a mix of both the number of trades that end up being successful as well as the amount of profit made. More importance is placed on the amount of profit made, but 1 major win will skew your average. That is great for that time period's return, but if you lose 9 out of 10 trades and just happened to make a 10,000% profit one time your results will likely not be great over the long-term. Eventually losses will mount unless you are consistently making five digit returns on your winning trades.
Ideally this number should be above half. That would just make it easier, but it is possible for a solid trader to only have a 1/3rd success rate on trades. If you happen to be an expert at holding onto a position until the perfect moment you can maximize each winning trade while cutting your losses quick. A lot of times you will be carrying a minimal loss in a position until the stock moves in your desired direction. Calling absolute bottoms or tops is extremely difficult.
There was a foreign exchange trading book I read that talked about opening a position in a way that it immediately went green. It was a breakout trading strategy and the author wanted you to aim for the perfect entry. Really think about your trading and think about the number of times you hit the button to execute your trade and the stock went green without ever dipping red. It really does not happen too often. So rather than being a perfect trader that holds onto winning positions just long enough while cutting losing ones at the perfect time just aim to have a strategy that wins more than it loses. Then you can use money management to keep your risk under control and maximize your gains over time. Avoid getting too greedy and focus on consistency.
As your trading account grows you will see more and more money flowing in. With compounding a handful of small gains can become large in the aggregate. For example, $1000 compounding at 10% a week for 10 weeks would be almost 250% overall. To make you feel better assume that you have a $20,000 trading account so $1000 on a rolling basis does not seem so gigantic. After accounting for transactions costs it is possible to do this with smaller accounts, but it just takes longer.
Money Management
If you risk 100% of your account on every trade it only takes one mistake to wipe you out. At least most stocks are not a total loss bet like in gambling. If it is a penny stock promotion it might as well be. Going from $0.05 to $0.0001 would leave you with a pittance of your position. Stops can help protect you from these insane losses so use them.
Money management goes beyond protecting yourself from losses. You need to balance the risk and the reward using enough capital to make a large enough profit to make it worth it, while not risking too much of a loss. If you win most of your trades then it comes down to using proper position sizes to make sure that you make more than you lose off those trades.
If you are making 5% on your wins but losing 30% on your losses, then you won't get ahead. I am talking about the total value of your account. I am focusing on the total here, because compounding really works at the top level. You are not working at the individual trade level. So a 10% trade win can be 1% for your account or 2% for your account. The next day you are either using more in your position or enacting two trades to make 10% on a higher value. You will always suffer setbacks but having soft goals like being positive for the week or the month can keep you on the path to increasing your wealth. You might end up with a bad month, but overall you want to keep pushing the positive. Until you have a very large trading account your are looking to scale up your trading.
Conclusion
Once you get a trading account of a certain size you will not need to keep building it. If you are trading with over half a million you can just save anything you make above that baseline. It would be nice if you could just keep compounding, but it is far harder to make solid consistent returns on too much money. Many hope to one day have that problem, where you just have so much money that its not possible to double your wealth every year.

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