There is a possibility these days of your trading firm going bust, it’s slim but as we’ve seen before it only takes one person to bring down a firm. So as traders used to managing risk we now need to consider how safe our funds are with our chosen broker and take necessary steps to reduce that risk.
1) Watch the stock/share price – Unfortunately this may not always save you, but keeping an eye on the share price of any listed brokerage may give you advance warning that something is up. Interactive Brokers and IG Group all have listed shares. If the price starts acting oddly then take note. It could just be the usual ups and downs of trading or it could be something that needs closer inspection. Check the recent news flow coming from the company and any resignations.
2) Only keep the funds you need in your trading account – It makes no sense to have more than you need in your trading account. If you suddenly need more funds in your account you can usually get them in instantly via a debit card. Getting them out can take time.
Here’s how I assess how much working capital I need in my trading account.
- What is the maximum size position your trading plan allows you to trade? Eg Your plan may allow you to trade 25 lots of a certain trade setup.
- What is the margin requirements for that position? – Your broker will usually have an intraday margin requirment
- What is the maximum drawdown your trading plan allows you to take before you reassess your approach? – What level of loss are you willing to take before you take a step back. EG: That could be maximum daily loss limit hit two days in a row.
With these figures you can work out what you need as working capital in your account. Margin requirements + Loss cushion. Skim any extra profits off the top regularly. When your trading size grows you can add more funds as necessary.
Trading is a risky business, we can never eliminate risk but we can take sensible steps to reduce it. Take care out there.