Trading a small account can be more difficult than trading a larger account. If you are trading a $100K account and you have a $5K draw-down you still have $95K in the account to trade. If you are trading a $5K account and have a $5K draw-down you are out of trading. So, the number one rule for trading a small account is PROTECT CAPITAL. The other thing to keep in mind, is that most traders trading a small account are also new to trading. That is not the best combination and requires having some help. Below are some tips to help you grow your small account and protect your capital.
Treat your trading like a business and not a hobby. Seek help and education. Trading is no different than a career or playing a sport. You spent a long time going to school to learn a trade or profession before actually doing it. If you play a sport like golf, you more than likely have had a coach or someone to give you instructions on how to swing the club and what strategy to use when on the course. More than likely you have spent many hours on the driving range practicing. Trading is no different. It requires education, practice and patience.
Below are several tips to help with preserving capital:
- Have a trading system and follow your system.
- Learn your trading platform and trade execution system before trading live money.
- Start small and manage the risk on each trade.
- Do not over trade and only take the best setups.
There are many trading systems available. Pick a couple of them that fit your trading style, learn them and follow them. A good way to follow a system, is to build a trading plan that includes the rules to follow. Then print it out, and have it in front of you when trading as a reminder to follow your plan.
Limit your risk to 1 or 2% of your overall account value for each trade. This allows you to protect your capital and not blow up your account, if you have several losers in a row. In volatile times like now, look for smaller targets and shorter length of time being in a trade.
The SEC will help you with over trading and only taking the best setups. If your account is less than $25K the SEC limits the number of trades you can take within five business days. Most traders with small accounts view this as a negative. I encourage you to look at this rule differently. Take it as a positive, and use it to help you to only take the best setups knowing that you can only take three trades in a five business day period. Here is a link from the SEC website that explains the rules for day trading. http://www.sec.gov/investor/alerts/daytrading.pdf
I hope this helps and Happy Trading!
Learn more from Tucker Stipe at Simpler Stocks.