Bulls on Wall Street
Tired of trading with a small account? Frustrated because it limits your earning potential?
It’s true: you need money to make a lot of money trading and investing.
This is actually a great thing for new traders. In the long run of your trading career, starting small is the right step. Here’s why:
Why trade with a small account?
Trading has a learning curve. You will make a lot of trading mistakes when you start out. These mistakes are inevitable. A small trading account minimizes the harm of these mistakes.
If you blow up a trading account worth $ 50,000, it will be a huge blow financially and emotionally. However, if you’re blowing up a $ 3,000 account, it’s not that big of a blow and a much more affordable learning experience.
When you start trading live, it’s not about making money. The point is to see if you can implement a strategy to advantage and consistently make money over a period of weeks / months. There is no reason to start trading with a $ 50,000 account if there is no evidence that you can make money with real capital (don’t be fooled by the results of paper trading).
Once you’ve consistently only made $ 100 to $ 200 a day, you can scale that to $ 500, $ 1000, and beyond.
The goal of trading a small account is to grow it into an account big enough for you to live on. Even if you have a lot of capital available, it is still a good idea to start with a smaller account and add more equity as you start to see success.
Now that you understand the expectations and benefits of trading with a small account, let’s discuss how to do it with a small trading account:
Risk proportional to your account size
Treat your $ 5,000 trading account as if you were trading a $ 50,000 account. If you are trading a $ 50,000 trading account, you are likely only risking $ 500- $ 1000 per trade. So for a $ 5,000 account, you should only be risking $ 50-100 per trade initially. Use this formula to determine how much you should risk per trade:
Never risk more than 1-2% of your total account volume on a trade if you are new. Remember that with a small account the goal is to develop your advantage and refine your strategy as a new trader. The size comes at some point.
Use the lever wisely
Leverage is a double-edged sword. This is the first thing you all talk about when using a small account. If you don’t know what leverage (or margin) is, borrow money from your broker to buy more stocks or buy short. For example, if a broker gives a 2: 1 margin when you have a $ 5000 account, you have purchasing power of up to $ 10,000.
When using leverage, focus on how much you are risking per trade. You can leverage a trade and still have a controlled risk. The key is to know how much of your trading account you are risking per trade BEFORE you step in and place your stop loss accordingly.
It has the ability to grow your account exponentially when used properly. To learn more about how to properly use leverage, read this blog here.
I’m sure you see people on Twitter posting huge PNLs every single trading day. How they do it and whether or not they actually trade for real money does not matter. They are likely much more experienced traders with much larger trading accounts.
Following anyone who posts their PNL on their Twitter won’t help you at all in the beginning. Focus on your own journey and build your skills and equity.
Have other sources of income
Since you are trading with a small account, you need to have other sources of income so that you don’t feel the need to force trades in order to make the money you need to survive. As mentioned above, you shouldn’t open a small account with the expectation that it will make a living, especially as a new inexperienced trader.
Set realistic expectations
Building a small account isn’t an overnight process. Don’t expect to switch from a $ 5,000 trading account to a $ 30,000 trading account in 6 months (not to say you can’t). Don’t rush the process or set unrealistic expectations. Your equity curve in your account is not going to go straight up:
This will cause you to force trades and actually slow down your account growth. Once you’ve seen green for several months, you can add more funds to your account so you can increase your position sizes to help speed the growth process. Remember, trading is a marathon, not a sprint.
Don’t move out!
This is one of the few times in your life you will hear this advice. The goal of a small trading account is to grow it into a larger account. You cannot grow into a big account by cashing out winnings.
You are trying to grow your account so that you can increase the amount you can risk per trade and thus the amount you can make per trade. When trying to break the pattern day trading rule, it is especially important to keep your profits there. Back to sources of income: don’t depend on your trading income if you are new and unproven.
Focus on a strategy
Less is more in trading. When you have a small account, you can’t afford to touch setups that don’t give you an advantage.
Stick to a strategy. And sit all day and wait, ignoring everything else. Once you have mastered 1 setup and consistently making profits with it, start adding more to your repertoire.
Slowly increase your position size
After you start seeing a few green weeks / months and have found some consistency, you can start increasing your position sizes. However, you won’t go from $ 100 risk per trade to $ 500 risk per trade. You slowly increase your size.
Go from $ 100 to $ 150 or $ 200. Rapid size can lead to emotional trading and is likely to lead to a large loss and undo weeks of hard work and disciplined trading. Once you demonstrate that you can manage risk and trade with advantage, you can increase your portfolio risk. You can increase it up to 5% if you really want to get aggressive. Once you’re ready, step on the gas and start growing your account faster.
Summary of Small Account Trading
- Risk proportional to your account size
- Use leverage wisely
- Do not compare yourself to others
- have other sources of income
- Set realistic expectations
- Focus on 1 strategy
- Don’t deduct any winnings
- Slowly increase your position size
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