Chapter 4 - Bankroll Management

Trading without a solid grasp on bankroll management is like setting sail on turbulent seas without a compass. In Chapter 4 - Bankroll Management, we'll delve deep into the heart of successful trading: safeguarding your capital.

From understanding the pivotal role of a well-managed bankroll to mastering the art of risk assessment, this chapter promises to be your guiding star. 

Whether you're a novice trader or a seasoned pro, mastering your finances is the key to long-term profitability. 

"I cannot tell you how many bankrolls I have blown through by overstaking and not understanding bankroll management. It's the Achilles heel of all beginner traders!" - Philip Borrowman (Horse Race Trading Creator)

Understanding the Importance of Bankroll Management

Your bankroll is more than just money; it's your ticket to the trading world.

Proper bankroll management ensures longevity in trading, reduces the risk of significant losses, and helps maintain a positive mindset even during downswings.

These examples highlight the significance of bankroll management in preserving capital, minimizing losses, and ensuring long-term success in trading.

1. The Tale of Two Traders

Imagine two traders, Alice and Bob. Both start with a bankroll of £1000. Alice decides to risk 10% of her bankroll on each trade, while Bob opts for a more conservative 2%.

After a series of unfortunate trades where both lose ten consecutive times, Alice's bankroll dwindles to £348, while Bob still has £817.

By managing his bankroll wisely, Bob has preserved his capital and can continue trading, while Alice has lost over half of her initial bankroll.

2. The Rollercoaster Ride

John, an enthusiastic trader, had a fantastic week where he doubled his bankroll from £500 to £1000. Elated, he decided to place half of his bankroll on a single trade, thinking it's a "sure bet."

Unfortunately, the market moved against him, and he lost £500 in one go. Had John practiced proper bankroll management, he could have protected his profits and avoided such a significant loss.

3. Chasing Losses

Sarah started trading with a bankroll of £2000. After a few losses, she decided to double her stake to recover her losses quickly.

The market continued to move against her, and in her attempt to chase her losses, her bankroll was reduced to £500. If Sarah had set a fixed percentage for each trade and stuck to it, she would have minimized her losses.

4. The Power of Consistency

Mike and Emma both start with a bankroll of £1000. Mike goes for big wins, risking 20% of his bankroll on each trade. Some days he's up, some days he's down, but the overall growth is slow.

Emma, on the other hand, risks only 3% per trade. Her profits might seem small initially, but over time, her consistent approach and minimized losses lead to steady growth, outpacing Mike's bankroll.

Setting Your Starting Bankroll

Before diving into trading, it's essential to determine an amount you're comfortable starting with. This should be an amount you can afford to lose without affecting your daily life. Whether it's £100 or £10,000, the key is to start with a clear figure in mind.

But how do you determine the right amount? Here are some key considerations:


The golden rule of trading is to never invest money you can't afford to lose. This isn't just about protecting your finances; it's about protecting your mental and emotional well-being. If you're trading with money set aside for essential expenses like rent, bills, or groceries, the pressure and stress will cloud your judgment, leading to impulsive decisions.

Emotional Detachment

When you trade with money you can afford to lose, you create an emotional buffer. This detachment allows you to make decisions based on logic and strategy rather than fear or greed. For instance, if you're trading with your vacation fund, a loss might mean postponing your trip, but it won't jeopardize your daily life. This perspective helps in keeping emotions in check.

Stay Focused

By setting a bankroll you're comfortable with, you can stay focused on your trading strategies rather than potential consequences of losses. When the fear of significant financial repercussions is off the table, you can concentrate on market analysis, refining your techniques, and learning from any mistakes.

Flexibility and Growth

Starting with a bankroll you can afford to lose doesn't mean it has to be a small amount. It should be an amount that gives you flexibility in your trades and room for growth. As you gain experience and confidence, you can reinvest your profits to grow your bankroll gradually.

Review and Adjust

Your starting bankroll isn't set in stone. As your financial situation, trading skills, and goals evolve, it's essential to review and adjust your bankroll. Maybe you started with a modest amount, but with a bonus or savings, you can comfortably increase it. Conversely, if you face unexpected expenses, it might be wise to reduce your bankroll temporarily.

Risk Management - How Much to Risk Per Trade

One of the golden rules of trading is never to risk more than a small percentage of your bankroll on a single trade. Whether it's 1%, 2%, or 5%, setting a fixed percentage ensures that you don't expose your bankroll to significant losses in a short period.

Risk management is the backbone of successful trading. It's the strategy that ensures you stay in the game long enough to see consistent profits and growth. Let's delve into the nuances of this decision:

No.1 - Percentage of Bankroll Per Tick or Trade:

  • Concept: This approach involves risking a set percentage of your bankroll on each tick movement in the market or for each trade you place.
  • Advantage: It allows for consistent risk exposure regardless of market conditions, ensuring that a string of losses won't significantly deplete your bankroll.
  • Example: If you have a £1000 bankroll and decide to risk 1% per tick, you're risking £10 for every tick movement against your position. If the market moves 5 ticks against you before you exit the trade, you'd lose £50.

No.2 - Percentage of Bankroll Per Trading Session:

  • Concept: Instead of risking a set percentage per tick or trade, you allocate a specific percentage of your bankroll to be risked over an entire trading session.
  • Advantage: This method provides more flexibility. If you experience a few losses early in the session, you can adjust your stake size for the remaining trades to ensure you don't exceed your session limit.
  • Example: With a £1000 bankroll and a 5% risk limit per session, you can risk up to £50 for the entire trading session. If you lose £30 in the first few trades, you'd adjust your stakes to ensure you don't risk more than the remaining £20 for the session.

No.3 - Percentage of Bankroll on Straight Back/Lay Bets (Value Betting):

  • Concept: This is when you're not trading in and out of positions but placing straight bets based on perceived value in the market.
  • Advantage: It's simpler and doesn't require as much in-play management. However, it's essential to have a strong understanding of value and an edge over the market.
  • Example: If you believe a horse is undervalued at odds of 5.0 and decide to back it with 2% of your £1000 bankroll, you'd place a £20 bet. If the horse wins, you'd make a profit based on those odds, but if it loses, you'd lose your £20 stake.

Key Differences

  • Nature of Risk: Trading per tick or session involves active management and is based on market movements, while straight back/lay betting is a one-off decision based on perceived value.
  • Flexibility: Trading allows for adjustments based on market conditions and how the session unfolds. In contrast, value betting is a fixed stake based on your analysis at the time of placing the bet.
  • Potential Exposure: With trading, especially per tick, you're exposed to rapid market fluctuations, which can be both an opportunity and a risk. With value betting, your risk is capped at your initial stake.

The Power of Compounding

As your bankroll grows, so does the amount you can risk per trade (while still sticking to your fixed percentage). This is the magic of compounding. By reinvesting your profits and maintaining a disciplined approach, even small gains can lead to significant growth over time.

Compounding is often referred to as the "eighth wonder of the world" in the financial realm, and for a good reason. It's the process where the returns on an investment, in this case, your trading bankroll, begin to earn returns of their own. Over time, this snowball effect can lead to exponential growth, turning even modest starting sums into significant amounts.

Let's delve into a practical example to illustrate the magic of compounding in trading:

Example: Imagine you start with a bankroll of £1000. You decide to risk 2% of your bankroll on each trade. If you achieve a consistent net return of 5% per week, let's see how your bankroll might grow over a year with the power of compounding:

  • Week 1: Starting with £1000, a 5% return would give you £50 profit. Your bankroll at the end of the week is £1050.
  • Week 2: Now, 5% of £1050 is £52.50. Add this to your bankroll, and by the end of week 2, you have £1102.50.
  • Week 10: By continuously reinvesting your profits, your bankroll has grown to approximately £1638.62.
  • Week 52 (End of Year): If you maintain this 5% weekly growth rate, your initial £1000 has now compounded to a staggering £12,682.70.

This example underscores the importance of consistency in trading.

While it's tempting to withdraw profits early on, allowing your bankroll to compound can lead to substantial growth over time. It's not just about the big wins but the consistent, steady returns that, when compounded, can transform your trading journey. 

Remember, in the world of trading, patience and discipline often yield the most significant rewards.

Dealing with Losses - The Drawdown

Every trader, no matter how experienced, will face losses. It's essential to understand the concept of drawdown, which refers to the decline in your bankroll after a series of losing trades.

By setting a maximum drawdown limit, you can decide when to pause, reassess, and recalibrate your strategies.

What separates successful traders from the rest is not the absence of losses but how they handle them. This is where understanding the concept of drawdown becomes crucial.

A drawdown refers to the decline in your trading bankroll from its peak to its trough, usually following a series of losing trades. It's a measure of the depth and duration of a downturn in your trading performance.

While drawdowns can be disheartening, they are a natural part of the trading journey and should be anticipated.

Example: Imagine you've been on a winning streak and your bankroll has grown from £1000 to £1500. However, over the next few trades, you face some losses and your bankroll drops to £1300. This £200 decline represents a drawdown of 13.33% from your peak bankroll.

Now, let's delve deeper into the implications of this drawdown:

  • Recovery: To recover from a 13.33% drawdown and get back to your peak bankroll of £1500, you'd need to make a profit of approximately 15.38% on your current bankroll of £1300. This highlights that the percentage gain required to recover from a drawdown is often larger than the drawdown percentage itself.
  • Emotional Impact: Drawdowns can be emotionally taxing. Seeing your hard-earned profits diminish can lead to feelings of doubt and anxiety. It's essential to remain level-headed, stick to your strategy, and avoid the temptation to chase losses or take on excessive risk to recover quickly.
  • Strategic Adjustments: While it's crucial not to overreact to drawdowns, they can serve as valuable feedback. If you're consistently facing significant drawdowns, it might be time to reassess your trading strategy, risk management protocols, or even your emotional discipline.

In conclusion, while drawdowns are an unavoidable aspect of trading, understanding and preparing for them can make all the difference.

By keeping a long-term perspective, maintaining emotional discipline, and using drawdowns as learning opportunities, you can navigate the challenges of trading and come out stronger on the other side.

Regularly Reviewing and Adjusting

The trading world is dynamic, and so should be your bankroll management strategy. Regularly reviewing your performance, understanding your win-to-loss ratio, and adjusting your risk percentage can help optimize your bankroll for consistent growth.

Bankroll management is the backbone of successful trading. It's the safety net that protects you from the unpredictable nature of the markets and the foundation that allows your capital to grow steadily.

As we move to the next chapter, "Basic Pre-Race Trading Strategies," remember that every strategy's success is amplified when backed by robust bankroll management.

Chapter 5 - Basic Pre-Race Trading Strategies >>>