How “Risk Tolerance” Dictates When To Take Money Out Of Your Forex Accounts And What To Do With Your Profits For Accelerated Wealth Accumulation
Most of what I talk about in my writings is about how to ACCUMULATE wealth through well thought out and systematic Forex trading. And more specifically, how to accumulate wealth faster by beating the returns of other investment opportunities.
So, it is easy to think that we are simply going to trade our accounts up to ridiculous amounts of money, and that is all there is to it.
But hold on, not so fast.
There is something standing in the way of you and making million dollar trades. And that is risk tolerance.
In this post I want to go over what risk tolerance is so you are prepared for it. But more importantly, I want to show how risk tolerance can be useful. It can tell you when to take money out of the market.
(And I’ll share what you can do with this money to increase your profit potential even more… while staying within your risk tolerance levels).
What Is “Risk Tolerance” And Understanding Your Own Limitations
In the Forex trading world, you’ll hear a lot about “risk tolerance” and there are a lot of different definitions floating around.
Here is my take…
Risk tolerance is the amount of emotional and financial pain you are willing to withstand in search of your profit goals… WITHOUT changing how you trade and abandoning your trade plan.
On the one hand, you do not want to risk so much on any one given trade that you put your account in jeopardy.
On the other hand, you want to risk enough so you can make money that matters.
I feel that 5% per trade (especially since we are only taking one trade per account), is a good fit. It would be very difficult to cause irreparable damage to the account, but we can also make money that matters.
But what happens when 5% of your account starts feeling like A LOT of money?
So, let’s say I am trading a $5000 account. 5% of $5000 is $250. How would you react to losing $250? How would you react to losing $250 multiple times in a row?
How you feel is going to depend on your relationship with money and your “risk tolerance”. For me, $250 a trade is reasonable because my risk tolerance (and confidence in my way of trading) is higher. For you, it might be too much.
I can personally handle a lot more risk.
The point is, if losing $250 on a trade, or losing $250 on multiple trades in a row starts to make you sweat and keep you up at night… you are in danger of changing the way you trade or abandoning the rules all together.
And that is a very dangerous position to be in.
So, you need to understand what your own limitations are. They have to be taken into account. Otherwise, you run the risk of letting your emotions get the better of you and changing or abandoning what works.
Growing Your Forex Trading Account Over Time
In a way, starting with a smaller account and growing it over time is a good thing. It gives you the opportunity to gain confidence in the trading. Over time, this confidence leads to a higher risk tolerance.
A higher risk tolerance means you can “handle” putting larger amounts of money at risk… which increases your profit potential.
I’m NOT talking about increasing your risk per trade here, which I keep at 5%. I AM talking about being able to trade larger accounts where 5% of the account is a substantial amount.
The objective is to continue trading by the rules as perfectly as possible over the long term. If your account grows to the point where 5% of your account seems like a lot of money to put at risk… take action.
The last thing you want to do is change the way you trade because of your emotions. You don’t want to stop doing what grew your account in the first place, do you?
Let me show you what I mean…
Let’s say you start with $5000 and are making an average of 30% gains per year for 20 years. (Yes, I know, we have the potential to make way more than this, but bear with me).
Here are the results…
Well, that sounds great. After 20 years you would have close to a million dollars. Not bad for starting with $5000 and spending only minutes a day trading.
But let’s be realistic.
After 5 years the risk per trade is $948 ($18,564 * 5%). The question is… Are you going to be able to trade the same exact way when your risk per trade reaches this level?
Maybe, maybe not.
What about after 10 years when you are trading $3446 a trade (68,929 * 5%)? Are you still going to be able to trade the exact same way without letting your emotions get the better of you?
The point I am trying to make is this. You are going to have limitations. And you need to understand your limitations so you can be prepared for them as your account grows.
If you trade long enough, there will come a time your account reaches a level where you reach your risk tolerance limitations.
In a way, reaching your risk tolerance is a good thing. It means you stuck with the trading long enough to grow your account to higher levels.
So, how are you going to deal with your risk tolerance limitations?
Possible Solutions When You Reach Your Risk Tolerance Level
There are various ways you can deal with the challenge of reaching your risk tolerance level. I don’t particularly advise these methods, and I’ll explain why shortly, but you should be aware of them.
If trading starts making you nervous because the risk per trade “feels high”, the last thing you want to do is change the way you trade. Therefore, you COULD reduce the emotional impact of trading a larger account by making adjustments to how much you risk per trade.
Here are two options for when you reach your risk tolerance level:
- Reduce the percentage risk per trade. For example, lower the risk from 5% to 4%, 3%, 2%, etc. so the amount of “money” you are risking stays within your risk tolerance comfort zone.
- Stop trading a percentage of your account and trade a fixed dollar amount at your risk tolerance level.
Either one of these methods can help you keep your risk per trade within your risk tolerance level and help you manage the emotional response to trading that could lead to abandoning the rules.
However, this is not the approach I take.
Remember, the point of my Forex trading is to Put Money To Work to make more money. Investing in my Forex trading provides me the opportunity to accumulate wealth faster by beating other investment methods so I can make the money I need in the time I have.
If I reduce the percentage risk per trade, or simply trade a fixed dollar amount, I am essentially putting LESS of my money to work to make more money.
Now, that does not make sense, right?
My Solution:
I prefer to RESET the account by taking money out and continuing to use 5% of my account per trade. I limit the account size, not the risk per trade. This way, I can keep the trading within my risk tolerance levels, without having a lot of my money sitting around doing nothing.
When To Start Taking Money OUT Of Your Accounts?
In my previous lessons we’ve talked a lot about starting and growing your Forex accounts. Basically, we talked about putting money into the market, or keeping money in your accounts.
But when do you get to take money OUT of your accounts?
After all, making money you can actually use to improve your life and secure your financial future is the point of trading the Forex market in the first place.
At some point, it has to be about taking money out… and not putting money in.
But just like everything else we do, it has to be planned.
Here is how I look at it…
Each of my accounts is a separate and independent Forex trading business. Each business trades ONE thing (currency pair, crypto pair, ect.) per account. And I risk 5% per trade, which means I only have a maximum risk of 5% per account at any one given time.
I feel trading 5% per account is low enough risk so it is not likely to do irreparable damage to my account… but gives me the opportunity to make extraordinary returns that greatly outperform other investment opportunities.
At some point though, this 5% per trade is going to be a considerable amount of money that tests my risk tolerance.
I deal with this by RESETTING my accounts from time to time to keep the risk per trade within my risk tolerance zone. Basically, I am compartmentalizing my thinking and using the money I take out to open new accounts to trade.
These new accounts can set up in various different ways:
- I could trade something completely different (different currency pairs, crypto, indices, metals, oil, etc.)
- Or I could trade the same thing in a slightly different way (different take profit levels, different trade management strategy, etc.)
Quite frankly, the amount of ways I can trade different things, or the same things differently, is limitless. This is the reason I can scale my Forex trading up to any income level I want over time… while keeping each account within my risk tolerance zone.
The point is, once my account reaches my risk tolerance level or beyond… It is time to start thinking about taking out money.
It just makes sense.
Let me give an example…
Let’s say my risk tolerance level is $1000 a trade. I reach this level when I have an account balance of $20,000 ($20000 * 5% = $1000).
So, let’s say I just decide to trade $1000 per trade as long as the balance remains above $20,000.
When the account reaches $30,000, I basically have $10,000 sitting there doing nothing. The 5% per trade is not being applied to this money. It is just sitting there.
This is not a bad problem to have. But if the point of all this is to put my extra money to work to make more money… Why would I have a bunch of money just sitting around doing nothing?
Instead of having that money sitting there as some sort of buffer, I think it is a better idea to take that extra $10,000 and put it to work by starting another account.
Therefore, I put this money into a different account to use for trading. This increases my overall profit potential because I have more money “working”.
I’m not a big fan of trading something just to trade something. I think picking the “right” currency pairs to trade, or market to trade is more important. So, you might think I would run out of new account possibilities.
But there are way more options that might be apparent at first glance.
Adding A Limitless Amount Of Income Streams
Most people want to trade the “best” version of the trading strategy. Since I focus on risk to reward, this usually means finding the best risk to reward levels to set my targets.
- Set the target too close, and you leave a lot of profit on the table.
- Set the target too far, and you’ll never reach the target.
- But if you set the target “just right” for the market conditions, you’ll maximize your profits
The problem is, I am not a clairvoyant. I cannot tell the future. Therefore, I cannot tell what the perfect target is beforehand.
Here is what I propose…
Instead of trying to pick the “best” risk to reward strategy to trade, add income streams by trading the same currency pair with different risk to reward targets.
No matter which risk to reward you start with, you should be profitable. So, why would you want to stop trading a profitable version to trade a potentially more profitable version?
Wouldn’t it be better to keep trading the strategy you started with… and then add other versions of the strategy on a separate account? I believe it is.
This way, you can add to your profit potential while simultaneously staying in your risk tolerance zone.
Staying Within Your Risk Tolerance Levels
Let’s recap a little to make sure we are all on the same page...
We’ve already gone over the power of compounding and how it can help your account grow exponentially. But with a growing account also comes putting more money at risk. Yes, it is still the same PERCENTAGE of your account… but the dollar amount will be higher.
At some point, the dollar amount you are risking per trade can start to make you nervous. And if you are nervous, you run the risk of abandoning the rules due to the emotions involved with trading higher dollar amounts.
But there is a way to continue to increase your profitability AND stay within your risk tolerance limitations… Compartmentalization.
Basically, you can trade MULTIPLE trading accounts, each within your risk tolerance zone. The trick is to think of each account as a separate and independent account. You need to compartmentalize your thinking.
For example, let’s say you are trading 3 accounts for the BTCUSD currency pair with 3 different take profit levels (3R, 5R and 10R). Since you are using one strategy, the entries are the same and you are placing 3 different trades on 3 different accounts.
However, If you lose the trade, you’ll lose that trade on each account. But you need to train yourself to think of this occurrence as ONE loss on each account… not 3 losses.
Basically, if you treat every trading account as a completely separate and independent trading business, you can add income streams and potential profits while still staying within your risk comfort zone.
Here is how it works…
- Trade account 1 up to when the risk per trade starts to make you nervous.
- Use the profits from account 1 to fund account 2 and trade this account up to your risk tolerance level.
- Then use the profits of account 1 and account 2 to fund account 3.
- And so on.
This creates a snowball effect where the possibility of opening another account comes about faster and faster.
And if you use various different versions and take profits, you can cover all your bases. No matter which strategy works out to be the best that year… you’ll be covered.
This also helps the trading from an emotional standpoint, because you are not trading only one version and get upset because a different version would have been more profitable.
In Conclusion
At this point, you should fully understand that there are going to be limitations to your trading. Your risk tolerance is your limitation. And trying to reach your profit goals by trading outside your risk tolerance level usually leads to abandoning what you were doing to be profitable in the first place.
Luckily, with some planning, you can use your risk tolerance to your advantage.
And the good news is, you can scale your trading up to any level you want while staying within your risk tolerance zone by compartmentalizing your trading.
Control your emotional reaction to how much money is at risk by managing your ACCOUNT SIZE. When you extend beyond your risk tolerance level, reset the account and start trading a different account that is also within your risk tolerance zone.
By doing this over and over, and treating each account as separate and independent, you can increase your profit potential, without running the risk of changing the way you trade.
And here is the best part…
At some point, you’ll have enough trading accounts running to be able to take money out of the market completely to use in the “real” world to improve your lives. When multiple income streams are working at their limit, and you don’t want to open additional accounts… you can then take the money out of the market completely.
And that is the point we are all working towards… because at that point you’ll be able to accumulate wealth faster than other investment opportunities, have multiple income streams running at their risk tolerance limits and enjoy a secure financial future.
Edward Lomax
