Rafael told me a story about how a woman he knew who was able to double her trading account once every two or three months. Truly a rare talent. This got him excited and he raised some money from investors to back her.
You would think that more money would mean more profits, infinite wealth and “happily ever after”, right?
At first, she almost lost the entire account. Then she got herself together and finally made it all back, finishing with a small profit. But the volatility was too high and the investors withdrew their money. But how is this possible?
If you can double a $10,000 account, doesn't that mean that you can double a $10,000,000 account?
Not necessarily. The reason is usually because you are thinking about the dollar amount, relative to your financial situation.
Here is what I mean…
The Theory Of Dollartivity
Trading a much larger account can really start to mess with your head, if you concentrate too much on dollar values. In the case of the woman Rafael was talking about, she was used to trading a $10,000 account and could comfortably grow that account on a consistent basis.
However, when she was given much more money to trade, the dollar values started messing with her head. First of all, she saw this as a huge opportunity because nobody else had every given her a chance like this before. This made her nervous and led to second guessing and not trading like she did before.
Second, and this is only speculation on my part, but the dollar values that she was dealing with were probably way out of her comfort zone, relative to here current situation.
I call this the Theory of Dollartivity.
For example, let's say that you are making $60,000 per year at a job and you have a $10,000 trading account. Then all of a sudden, you get some investors and start trading a $5,000,000 trading account.
Risking 1% of your $10K account per trade means that you are risking $100 per trade. If you are used to making $60K per year, then this is not a huge risk. But if you start risking 1% of a $5MM account, that is now $50K of risk per trade…almost the same amount that you make in an entire year at your 9-to-5!
See how that can really mess with your head? The money management is exactly the same, but dollar value, relative to your financial situation, comes into play. If you are in a trade and down $25K, you might start to freak out, when in reality, it is no different than being down $50 in your $10K account.
So how can we overcome this? I'm sure that there are different ways to do it, but here is the easiest way that I have found…
Why I Switched To Watching Pips
I have been thinking about this a lot lately and realized that there are times when I close out a trade because the dollar value scares me a little. This goes both ways, sometimes I'm afraid to lose my current gains and sometimes I think a loss is too big and close the trade too early. Then of course, the trade turns around and goes wildly in my favor.
You know what I'm talking about.
Therefore, I have started watching pips instead of dollar amounts. I changed the Oanda app on my phone to only display pips and I will do the same for my Java client. This is what my iPhone app looks like now:
By only watching pips and current price action on the charts, this has really helped me see the markets more objectively and make decisions based on what the market is telling me and not because I have an emotional attachment to the dollar value on my P and L. I feel that making this change will help me scale to trade any sized account because the experience will be very similar…
…just watching pips.
Do you watch dollar value or pips when you trade? I would be interested to find out, leave a comment below and let me know.
Photo Credits: Upside Down | Money Heads