A steady and thoughtful process is the only way to achieve a large trading account, but very few start with big performances. If you have an account valued at $25,000 or less, you have to approach trading differently from those with larger budgets.
The following rules will make trading in a small account less stressful, more profitable, and less worrying:
Trade using defined-risk approaches
Spreads are an excellent way to precisely define the maximum risk for anyone trading in your account, allowing you to experience the markets with a smaller account in an elegant and capital-efficient manner. We like to use vertical spreads and Iron Condors to limit maximum loss to a manageable amount for our trading.
Don’t use stops
Often, stops are damaged. This leads to losses. Instead, we are using option spreads to define risks to a comfortable level, as mentioned above. We recommend setting price alerts to re-evaluate investment opportunities for those who simply must own stock, preferably with a bias toward exiting or using put options to protect positions.
Take profits
Watching a profitable position go negative is the worst experience for a small account. Not only is the financial loss devastating, but also the psychological trauma.
Automate your profit-taking
After you enter a trade, you should place an order to exit at your profit target as soon as possible. Don’t let emotions cloud your decision. The frequency with which you receive notifications that profits have just been credited to your account will surprise you.
Be picky
Every day, you have dozens, if not hundreds, of investment opportunities to choose from—the risk per trade increases (as a percentage) with a small account. To put your capital at stake, you need to look for the best opportunities to respect that. Ensure you have your thesis and unique data advantage in order before placing your order!
Don’t time the market
Don’t miss out on an opportunity once you see it. Avoid predicting the market’s movement over the next 1-2 hours or days to get a better price. Investing penny-wise but pound-foolish is a surefire way to squander good opportunities and get involved in some already broken trades.
Focus on discipline and patience
As your account gets smaller, every action you take will be more significant. Establish a plan and stick with it. Patience is crucial to maximising your chances of success. Remaining levelheaded and avoiding emotion is key to success. Take a disciplined approach and make yourself the best possible candidate if you want to win!
Risk more per trade
As the amount of money you have to trade decreases, each trade becomes more important. If you have a small account, you should invest 5-10% of your net capital per position.
Bottom line
Despite the smaller size, we have seen bigger accounts that follow these commandments succeed and profit just as well as smaller ones. Trading with a smaller version will allow you to develop skills and habits that will help you grow your account.
