Are you ignoring 98% of your profit potential?

You know that theory that we only use 10% of our brains?

It’s the premise behind the latest Scarlett Johansson picture (that I haven’t seen yet). And it’s a nice idea – if we just did a few of those Dr Kawashima brain-training exercises, we could be 10 times smarter.

If only I could tap in to that extra 90%, I’d be able to tell you the highest known prime number (how useful would that be?) … or solve the Times cryptic crossword … or remember where I left my keys …

Unfortunately, theory that we only use 10% of our brains has been laughed out of court. Apparently, there are certain moments, like when we’re at rest, when we’ll only be using 10% of our brain.

“It turns out though, that we use virtually every part of the brain, and that [most of] the brain is active almost all the time,” says neurologist Barry Gordon from John Hopkins School of Medicine in Baltimore. “Let’s put it this way: the brain represents three percent of the body’s weight and uses 20 percent of the body’s energy.”

I can’t think of a better reason to sit at my desk and eat Hobnobs.

But I’ve strayed away from the point I wanted to make … it might be false that we only use 10% of our brains … however, there are a lot of traders who are only using 2% of their trading funds …

I’m talking about the 2% rule … the one that tells you to only ever risk 2% on any trade.

Don’t get me wrong – I’m not suggesting that you should start risking more than 2% on a trade.

But what are you doing with the other 98%?

Too many traders keep the lion’s share of their trading fund languishing in their spread-bet account. That’s great for your broker … I’m sure he’s loving having that cash there – he’s probably using it to help fund his skiing holiday. In fact, he’s probably encouraged you to follow that 2% rule.

But you’re not taking advantage of the beauty of leveraged trading, and you’re ignoring 98% of your profit potential.

Of course, it’s important to keep enough money in your account to cover the margin requirement – if you’re confused by margin requirements (most traders are!) check out this explanation.

But, whatever you do, don’t let your broker sit on your nest egg – he’s making enough money out of you already. Instead, you could be using this money in a low-risk investment – at the very least, it should be sitting in a savings account!

The double-edged sword of leverage

‘Leverage’ is the Lindsay Lohan of the finance world – it’s been pumped up out of all proportion, and is too often found in courtrooms.

In 2007, Lehman Brothers were working on a leverage of 44 to 1.

This is not the kind of thing I mean when I talk about using leverage to our advantage. Instead, we can use leverage to maximize returns AND to spread our risk.

Just because you’re risking 2% on one trade, doesn’t mean that 98% of your fund should be standing, holding its breath.

Balancing risk across your spread-bet portfolio

If you’re running multiple positions across different strategies with your account, you’ll need to have a think about what areas you’re trading … whether you’re long or short … what correlates to what … and if you’ve overexposed yourself.

This probably sounds like a huge headache, but taking a look at the markets you could be in, and drawing yourself up a few simple rules could be all it takes.

For example, if you’re trading global indices, you could set a rule that you’ll never be long on more than 3 indices at a time … or short on more than 3 indices at a time.

Or, if you trade cable, eur/usd and the Dow Jones … you could set a rule to never be long all three or short all three at the same time.

But what if you don’t want to be that active?

There are plenty of ways to get that 98% working harder, without you having to work any harder.

First off, there are lower-risk, hands-off investments you could look at. Top of my list at the moment is the PIE strategy – I have to say it’s proving itself to be worth every penny. As yet, I’ve never taken a loss on this, or come close to losing (and even if I do have a bad month, there’s the special trick that should enable me to breakeven on a trade).

If you’ve been considering PIE yourself, but not yet taken the plunge, it comes with my full recommendation. And if you haven’t yet taken a look at it, you can download my full report HERE.

Whatever investment you choose (even if you’re just sticking it in a savings account), bear in mind that you may want to get at that money if you’re looking to reposition funds – for example, if you’ve had a drawdown and need to add funds to your spread-bet account.

And a final reminder …

Don’t fall victim to a margin call

With less money languishing in your spread-bet account, you’re more likely to be sailing close to the wind on margin requirements.

While I’ve talked about releasing 98% of your capital – in reality, some of that capital will already be working as margin on your 2% risk trade. It’s important that you have an understanding of margin requirements on your trades – and that you’re aware that these requirements will change as your trade moves into and out of profit.

Make sure you have sufficient safety net in your account to manage the trades you have open, but PLEASE don’t leave too much money in the hands of your broker!

Related posts:

What is margin? What is a margin call?