Bankroll Management - Part 2

When to drop down in stakes

Good bankroll management is all about managing the amount of money you have available to trade in such a way that you wont lose the lot. One of the key parts of this is knowing when it is time to drop down and start trading at lower stakes. Many people who attempt to trade using a trading bankroll will begin trading at certain stakes and continue to trade at those stakes no matter what. This isn’t bankroll management. If you hit a bad run, as all people do and lose 50% of your bankroll and continue trading at the same stakes you are going to be under funded to trade those stakes and put yourself at an increased risk of going broke.

A good time to drop down in stakes is when your bankroll takes a 30% hit. This means if you’re trading low volatile products and lose 6 trades in a row its time to drop down for a while.

The math...
Let’s say you're trading the FTSE at £2 per point using a 20 point stop and have a bankroll of £800. You have a bad month and lose 70% of your bankroll, this leaves you with just £240 to trade with.

If you use bankroll management and drop down to £1 per point on the FTSE after losing 30% and continue to lose the same amount of trades at the lower stake of £1 per point you’d be left with a bank roll of £400.

The £400 you would be left with is an adequate bankroll to trade £1 on FTSE with while £240 would leave you under funded and at risk of going broke trading either £1or 2 per point.

Remember you can always move back up in stakes after a few good wins.

We all know how easy it is to chase lost money. Discipline is a key part of trading and managing your bankroll requires a lot of it. As a trader you need to resist the urge to move up stakes to try and win money that you’ve lost in a trade or continue trading at the same level after a number of losses because you feel like your losing by moving down stakes. Using bankroll management will stop you from going broke, keep you trading for longer, allow you to improve and become a better trader with out having to acquire a new bankroll.