If you have your trading capital in two different places, and you should, you may be unwittingly splitting your risk for no reason, and cutting your profits in half.
I also made a podcast episode about this, if you prefer to consume your material this way.
First Off, Why Put Your Money In Two Different Places?
In the Broker video, I said how my #1 requirement in a Forex broker is safety.
After all, if your broker takes your money and runs, who cares what else it can do far you?
The chances of this happening with a large well-capitalized broker, or a broker regulated in a major country is extremely low.
But I always want to have my trading capital in more than one place just in case. Just like I want to have my investments all over the freaking place.
Some of you may also be a bit anal-retentive like me and trade one market on one broker, and another market in a different broker.
Some of us, if American, may have no other choice but to go this route.
Whatever your reasoning is for dividing up your risk capital, make sure you don’t make this one crucial mistake….
Don’t split your risk between your multiple accounts.
In This Video
The idea for this blog pot and podcast came to me long ago, but as mentioned in the podcast, I forgot, and thankfully the Indices video (and the lovely viewers) reminded me to tackle this issue.
It was at this part right here.
In it, I wanted to show just how powerful it can be to become proficient at multiple markets.
I said if you added these altogether, you would have a 31.5% return on your money.
This confused some, and rightfully so.
But I was correct, and though what I’m about to show you may seem reckless, it’s not. At all.
Divide, And Don’t Conquer
Let’s look at it again.
And for the sake of simplicity, let’s take Oil out and just keep the other three markets, and say we can achieve a 10% return on each year after year.
To make things even more simple actually, let’s take out Indices and pretend we haven’t gone that route yet.
We are Forex traders, and we are Spot Metals traders, and we can achieve a 10% ROI year after year.
Let’s also say our overall trading capital is $20,000. This is what we can risk on trading.
Are you with me so far?
We also need to remember our hard rule when it comes to risk. 2% on each trade.
If we divide our capital into two different accounts — $10,000 for a FX trading account and $10,000 for a metals trading account, we may run into this mistake right here….
You have a long trade alert on the EUR/USD, and it’s the only alert you have for the day.
You go to your FX account and calculate your risk.
$10,000 X .02 = $200
It should have been double that.
Double My Risk? Seems Reckless.
If your trading capital is $20,000, then your 2% risk is $400, no matter which sub-account you are trading from.
You’re not “doubling your risk”. You just putting it where it should have always been from the start.
If you would have chosen to trade all of this on just one account, this would have been easy, because you would have had that $20,000 figure at the top of the screen, staring you right in the face.
And when the EUR/USD long trade came about, you would have calculated $20,000 X .02 = $400 with no problem.
SO WHY IS IT ANY DIFFERENT NOW??
If you were to risk $200 on a $10,000 account, this is only 1% risk of your trading capital. This makes no sense to do.
If you kept it this way, you would fall well short of your capabilities.
So let’s draw it out.
If You Did NOT Separate Your Money
All-In-One Trading Account
Starting Capital = $20,000
10% return on Forex trading = $2000
10% return on Metals trading = $2000
Total return = $4000, or 20%
As it should be.
If You DID Separate Your Money Into Two Accounts
Split Trading Account
Starting Capital = $20,000
10% return on your $10,000 Forex account = $1000
10% return on your $10,000 Metals account = $1000
Total Return = $2000, or 10%
You just cut your returns in half for no reason.
Why do you hate money?
Trade It Like One Account, Always
If you wanted to, and if you could, some people may just want to to trade everything out of one account, and this is risky form a broker standpoint, but certainly the easiest way to go.
This way, your risk is easy to calculate all the time, because it’s right there staring you in the face all the time.
And if you really can achieve this:
Then you should be able to achieve close to a 31.5% return on your capital.
I know, this number isn’t dead on because your total is going to change, and thus the risk will too, yadda yadda, shut up nerd.
But these lofty, hard-to believe numbers aren’t so lofty and hard to believe when you finally get to where you need to be.
If anything, you’re protecting yourself against a really bad year in one market.
Starting Capital = $20,000
10% in FX = $2000
-15% in Indices = -$3000
10% in Metals = $2000
Total = $1000 = +5% return
You May Have To Break A Commandment Here
There’s an outside chance you’ll run out of margin if you do it this way. Not a great chance, but a chance.
In the Leverage episode, we set our hard rule at 20:1 leverage.
Good rule by the way, does not need to go higher than 20:1
………unless you’re splitting your trading up into two accounts. Then go to 40:1 if you can.
As mentioned in the podcast, even cranking it to a 500:1 leverage won’t matter because of the way we trade. 2% is 2% no matter what.
Just no need to tempt you further. 40:1 tops, and only in this special case.
Exception To The Overall Rule
If you have a stock market account, or a mutual fund account or something like this, you may want to keep it separate from everything else, along with the risk. These markets just operate too differently from what we trade.
Just think of it as adding more currency pairs to the mix, because this is exactly what you’re doing.
Your overall trading capital is what you use to calculate your risk, not the amount in the sub account.
Seems reckless, but is not reckless.
Especially if you are a seasoned No Nonsense Forex trader.
If you are not, then trading anything at all is not really a great idea anyway.