How can a small amount of capital be made big? This question is believed to be of particular concern to many people. The following content hopes to help you know how to do this.
First of all, in the process of growing from small funds, we must first understand what are the factors that determine profit and loss behind each order. There are three core factors: ability, risk, and time. On the surface, it seems that the income is accumulated from one order after another, but in fact, everyone reaps the final result through the investment of ability, risk, and time. Think about it, if a newcomer who has just entered the market, or a person who has suffered losses and is anxious to recover his capital and make a profit, if measured by these three factors, does he belong to the category of having no ability to make a profit and is unwilling to invest time, then what can he do if he wants to make a profit? If he can only invest in risks and only invest in risks to gain returns, then he is equivalent to roasting himself on the stove.
A person's trading order situation can clearly reflect the state of these three elements, and the investment in these three elements determines the final trading outcome. The order is merely a part of the trading process. Conversely, if you want to achieve a certain result in your trading, you need to understand what your state is concerning these three elements. I have summarized the three most common trader states: the first state is that the individual does not have the ability to profit and is unwilling to invest too much time, hoping to gain returns quickly. Therefore, they can only invest heavily in risk. This is the first state, where the lack of profit ability means that gains and losses depend on luck; this state can be summarized in one word: gamble.
The second state is that the individual has the ability to profit and is also willing to invest time while relatively investing less in the risk element. This state corresponds to gradual growth; if summarized in one word, it is stability.
The third state is that the individual has the ability to profit but is unwilling to invest too much time. When encountering opportunities they are confident about, they dare to take risks. This state can be summarized in one word: take risks.
Understanding these three states, let's return to the topic of how to grow small funds. How to grow small funds—should we gamble, seek stability, or take risks? Clearly, it relies on taking risks. Gambling relies on luck; the money earned through this luck will ultimately be lost due to lack of skill. And since small funds are inherently small, if you do not take risks when you have the ability, your growth will be very slow. Of course, pursuing stability is also a good approach, but most people with limited funds often hope to achieve returns quickly and are unwilling to invest too much time, which requires investment in both ability and risk. In simple terms, it means seizing opportunities. I believe you have seen many people in society who seized an opportunity and reached the peak of their lives; essentially, it's about seizing opportunities.
However, taking risks and gambling are different. Many people may believe they are seizing opportunities when they are actually gambling. The difference lies in the aspects of risk and ability. First, risk should be limited within a reasonable range. Let's assume that you play a game where if you win, you double your money, and if you lose, you go to zero. No matter how skilled you are or how many times you win, one mistake will bring everything back to zero. Therefore, when risk exceeds a reasonable limit, regardless of how capable you are, you are essentially gambling. So, how much risk is reasonable? This is closely related to the size of your ability. The stronger your ability, the more risk you can take. The weaker your ability, the less risk you should take.
So how do you calculate this specifically? This leads us to the Kelly formula, which is a method to assess the size of your ability based on your accuracy rate and profit-loss ratio to determine how much risk you should take. If you want to understand, due to space limitations, I will discuss it next time, or you can find me on my homepage to learn more.
The second element is ability. In terms of ability, many people do not have a correct understanding of their own capabilities. Many people continuously lose money yet believe they can be profitable, attributing it merely to poor mentality. This is actually an incorrect assessment of one's own ability, which leads to many situations where you encounter an opportunity you believe is certain, and you are willing to take risks to seize it. However, in reality, you are overestimating your own ability; you think you are seizing an opportunity, but you are actually just gambling.
So how do you determine whether you have the ability to profit? You must look at your past trading data; only objective profit can represent profit ability.
When you can clearly and succinctly summarize the types of opportunities in your trading, you have your own ability to calculate the limits of risk you can take using the Kelly formula. What you need to do next is patiently wait for these types of opportunities to appear and achieve capital expansion through investments in these opportunities. This is the path for small funds to seize opportunities and grow.
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