We are going to be taking a second look at undercapitalization when it comes to trading the markets. In the first article we had a rough overview of this problem, and how it could effect the average retail trader. Today we are going to have a second look, and describe other issues this actually causes with our trading.
Typically over a string of trades you have winners and losers no matter how long you have been trading. This happens no matter how much you know about technical analysis, and strategize. This is because every single move in the market is different than the last! Sure, there are instances when patterns repeat themselves but even still there are differences. It is impossible to know exactly what is going to happen.
There will be times when we have losing streaks, and winning streaks. If you start off undercapitalized in the markets you may not last through the very first losing streak, or, you could start right in the middle of one.
The main reason you want to ensure you have adequate capital to invest, is because you will need it in order to figure out if your edge is actually working. This doesn’t mean that you placed a couple of trades and they didn’t work out so you moved on to something else. It means that you stuck to the rules/plan you have created, you bought or sold at an area you believed to have a higher probability, and that you managed your risk and profits well.
If in fact, the timeframe at which you entered the market, the strategy/patterns you recognize are not strong enough to make winning trades, then you could very easily take that small capital to nothing or very close in your first week!
Let’s look at this from a realistic business perspective since your trading could be viewed as your business. Statistically, small businesses have about a three year window to get into the profit. From the initial stages almost all small businesses start at a deficit. One of the main reason for business failures……….you guessed it, Undercapitalization! They do not have enough capital to ride it out until they are able to generate profits. What is really happening is that like your trading, a business has to be able to spot problems and correct them. Throughout the time they are encountering new problems they are still in a deficit. Until they correct their issues and slowly get themselves viable, they have to at the minimum survive.
I am not saying that you shouldn’t try your hand at trading but if you are undercapitalized, you may want to take your time and be patient with yourself. I believe that anything can happen and that everyone has an unlimited potential. I want the best for everyone when it comes to their goals and dreams. I hope you all have a profitable journey.