Why Multiple Accounts?
If you’re new or relatively unfamiliar to trading you might ask – why do I need
more than one account? Assuming you have sufficient equity in the account, you
still have a very potent enemy when you are ‘negotiating’ the markets…your own
mindset. Fear takes over when you are losing money, greed takes over when you
are making money. These are two powerful emotions, which even seasoned traders
have a tough time controlling.
So how do multiple accounts help you? Psychologically, the level at which you have committed sticks to your mind. What do I mean by this?
Let’s take the gold account and you found a ‘good buy point’ which did not turn out to be that good after all...
Assume the price sinks further to $1350 in the next two to three months. That would be a total of -$575 running loss. That could be a bit painful for an equity of $5000 since you’re losing over 10% of your equity at this stage. There are two lessons here.
Let us say you still made the mistake of trading too high at 0.05 lot for the $3500 account, and you are at a running loss of said -$575 at the moment. However, this could be the next great buying opportunity although you are already over leveraged with Account 1. This is where rules are important, when you set a limit of exposure (Every responsible trader has a limit!) for each investment channel. For example:
If you have a proper plan for each trade in this manner, it is difficult to ‘panic’ or start losing sleep over running loses. Do not forget, a running loss becomes a loss only when you liquidate the trade.
However, why liquidate when you are on the major trend? Now, you might ask…how do I know that I am on the major trend? Well, that’s another topic of discussion which you are free to explore.
Now let us imagine you felt $1465 was a good point for a buy and went in with 0.05 lot. At the moment the price has sunk to $1456. That’s a running -$45 loss at the moment.
1. DO NOT trade at 0.05 lot when you only have a $5000 account! Yes, it is still too high.
2. This loss can be turned into an opportunity if you had another decent sized account!
Say your equity total of $5000 was split into two accounts, $3500 (Account 1) and $1500 (Account 2).
Maximum exposure for Account 1:
Stocks (on margin): $1000
Thus, you have reached your maximum exposure for this account. Your
other account is still available to take on this opportunity. Granted, not with
similar lot size since it is a much smaller account. But why lose out on this
opportunity? Instead of sitting back and watching Gold probably fly up again
from a great support point of $1350, you could go in with a 0.01 or 0.02 lot
size and take advantage of the ride. So in trading terms, this becomes your
“Stage 1” for Gold.