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Unfortunately, beginners with small accounts wipe out more often than they succeed. There are several reasons why but most of the time it’s because they take on too much risk.
But don’t let your account size discourage you. Many traders start out with a small account, and having more capital doesn’t make you a better trader.
A majority of the standard trading principles apply when trading a big or small account. However, a different approach is needed when dealing with less capital. Here are the best tips to help you succeed.
Managing risk is the most critical part of becoming a successful long-term trader. Risk management rules vary depending on trading style, experience, and account size. Defining how you will manage risk is an essential part of any trading plan.
When trading with less money, your profits and losses are smaller. Many advocate to take on more risk to grow your account quickly, but you’ll blow up just as fast if a trade goes against you. Which is how most beginner traders fail.
If you are inexperienced, it is best to risk less per trade until you get more comfortable. Resist impulsive urges to go all in. It’s easy to get impatient and take on too much risk hoping to double or triple your account. It might work out for you, but if it doesn’t, you’re out of the game.
Survival is key. If you have a small amount of capital, you can only sustain a small number of losses.
It’s best to have strict risk management rules for the majority of your trades. However, you’ll need to place bigger bets when great opportunities come along. Start small, gain experience, and then take on a bigger trade when a great opportunity comes along.
Win Big and Lose Small
Keeping your losses small is even more crucial with a small account. The minute you know you are wrong, get out of the trade. The minute you know you are right, increase your trade size.
Maximizing your winners and minimizing your losers is key for prosperous trading with any account size. The difference with a smaller account is that you really need to maximize your winners if you want to grow your account.
A stop-loss order is either a savior or a foe, depending on who you ask. Generally, more experienced traders that are closely monitoring their trades don’t use them.
Beginners with small accounts will likely benefit by using a stop-loss. It takes away the psychological pain of taking a loss.
Set your stop-loss at a technical area that would prove you are wrong. Make sure this area is within your risk management rules. Don’t put it in an obvious place either or it could get taken out before prices reverse.
Let Your Account Compound
It’s not really a profit until you withdraw the money from your brokerage account. At least that’s how I view it. But realizing gains to buy things shouldn’t be a priority when you have a small account. Your focus should be on creating a large amount of capital to trade with.
Don’t be tempted to withdraw any of your winnings until you’ve built a reasonable account size. Just pretend it’s not money.
Having strict risk management rules and a small account can be tedious. That is mostly how trading should be, boring and tedious. Don’t fantasize about making unrealistic gains and stray from your plan.
You should be sitting and waiting for profitable trading opportunities. You will need to be even more patient with a small account.
Overtrading happens, and those with larger accounts can usually survive it. If you overtrade with a small account, you’ll be out in a flash.
You don’t want to overtrade, but you shouldn’t under trade either. Watch the market as much as possible, and learn what causes price movements. Paper trade in your head when you are unsure of a trade and track how it turns out.
I don’t recommend using a paper or a simulator account. You don’t gain the financial and emotional experience needed with fake money. Having skin in the game is the only way to become a better trader. Even small trades help you gain experience.
Remember the Pattern Day Trading Rule
Small accounts are subject to the Pattern Day Trading Rule (PDT). This rule prevents you from making over 3-day trades in 5 trading day period. The PDT rule can cause catastrophic damage to your account if you forget about it.
You may be ready to exit a trade only to find out you have hit your max amount of day trades. At this point, you must decide between getting marked as a pattern day trader and losing trading privileges for 90 days or holding the trade overnight. It’s not a fun decision to make.
Cash accounts aren’t subject to the PDT rule but have other restrictions, such as good faith violations (GFV) that limit small accounts.
Be aware of how many day trades you have or how much settled cash you can trade with. Otherwise, you might end up in some trouble.
Trading Options with a Small Account
Options trading is riskier than trading stocks. Trading options in a small account takes more discipline and knowledge than most beginner traders have. Regardless of the risk, beginners are drawn to options because the leverage can quickly turn a tiny account into a huge one.
Understand How Options Work
Options are complex financial instruments that take time to fully learn and understand. A great place to start is our beginners guide to options trading and options greeks for beginners. These articles will allow you to get the basics down.
You will need to continually practice with small trades to develop some experience before increasing your risk. Options contracts have drastic swings in price, making it difficult to manage risk in a small account.
Cutting losses on options isn’t as easy as it is with stocks. There are many factors that affect the price of an option contract and you can’t bag hold them because of expiration. Another reason why you need to thoroughly understand how they work.
Be Very Picky When Choosing Trades
Options trading with a small account is difficult in the long run. You will need to be very picky about which options you buy. Only trade setups you are confident about and limit the number of contracts you buy until your account is larger.
Buying options is usually a loser’s game. Most inexperienced options traders buy far out of the money and close to expiration contracts because of how cheap they are. These are essentially lottery tickets, and the odds of striking it big are rare. Playing with weekly expiration contracts is a legitimate strategy but can easily lead to a wipeout.
Selling options offers more consistent profits but you’ll need knowledge, experience, and a large account size to be successful.
These tips to succeed with a small account can and should be applied to any trading account size. In most cases, a smaller account can be more difficult to trade–but it isn’t as limiting as you think. A poor trader can destroy a huge account just as easily as they can destroy a small one.
Every trader has to start somewhere. Apply these tips when trading, and your small account will turn into a big one.