If you’re tired of being told that you can’t start trading properly until you have £10,000 ($16,500), then this one’s definitely for you. I started with just £50 and am now a profitable small account trader – with an unconventional view on trading. Over the last 2 years, I’ve developed five steps that are not like anything else you’ll read that, with correct application, will help you become a successful small account trader.
These are things that have taken me almost two years (and quite a bit of financial loss) to learn and evolve into a trading ‘style’, and I’m sure if you ruffle about them enough, you’ll find the diamond (chippings, maybe) in the rough that will help you turn your own small account into a profitable one.
Before you get to the good stuff further down the page, you should try and read my earlier post ‘Can You Trade With a Small Account?‘, where I ask a full-time professional trader to explain some of the pitfalls of small account trading. I cannot overstate how important it is to be aware of the problems that you might face as a small account trader before you embark on this amazing, rewarding journey.
Having that knowledge embedded into your subconscious will help provide you with some of the fundamental building blocks and predisposed impressions that will form your trading ‘world view’. This is another essential ingredient if, like me, you don’t want to waste your life poring over news reports, bulletin boards and market commentary and would rather tap into your trading intuition to make snapshot trades.
After you’ve spent a few minutes taking in the background information, come back here and make full use of these 5 steps that will help you become a successful small account trader. Steps one and two are quite commonly referred to at other websites but steps three, four and five are where my unconventional style and unique perspective might help you a bit more.
Step One: Make Sure You’re Managing Your Risk Properly
This is more important for a small account trader than almost anything else. Your number one priority is to protect your capital. You don’t have lots of spare cash to keep throwing at bad trades so every trade you make has to count. That doesn’t mean, however, that they all need to make money – because that won’t happen – but they do all need to be executed perfectly in accordance with your system or trading style.
Sometimes that means not trading at all.
To be completely clear, the basic principle of risk management is to minimise your losses and protect your capital. You can achieve this by implementing a number of devices in your trades.
Use Stop Losses to Correctly Size Your Positions
If you have an account of £100, you need to find a way to spread your risk over as wide a range of trades as possible. This does not need to be all at once. When you read about what traders with larger accounts are risking per trade, you often come across figures as small as 2% capital risked per trade but for those of us with tiny accounts, this is just not possible.
For you, me and other small account traders, 5% capital risked per trade is more manageable – that’s £5 per trade. I have a slightly larger appetite for risk so I risked 10% per trade in the beginning (£10).
OK, but what exactly does that mean?
For each trade you make, you don’t ever want to lose more than your £5 ‘risk’. In order to do this, you need to correctly understand how to use Stop Losses and Position Sizing.
- A Stop Loss is the price at which you will close your trade and take a loss if things go against you.
- A Position Size is the amount of money you will risk per point of price movement.
For example, in the Standard Chartered (STAN) chart below, the right-pointing arrow represents my arbitrary stop loss (the price at which I believe the trade has gone against me) and the vertical arrow pointing down is the price at which I opened the trade and the direction in which I think the price will go (down).
The difference between the opening price (1617) and the Stop Loss price (1677) is 60 points. Because I have grown my account size over the last 5 months, I am now able to risk £60 per trade (2% of my total capital) and this is the figure that allows me to calculate my position size. In your case, you could only risk £5 on this trade, so you would need to substitute the figures below to suit.
Risk (£60) / Points to Stop Loss (60) = Position Size (In this case, it was an easy £1)
If you were risking only £5, your position size on this trade would be £0.08 per point which means that for every point the price goes up, you would make 8p and for every point it goes down, you would lose 8p. Prices fluctuate throughout the day. Obviously, 8p doesn’t sound like very much, so in this case, you probably wouldn’t/shouldn’t open this trade.
You might, however, open an alternative trade with a 20 point Stop Loss. This would give you a Position Size of £0.25 per point.
Protecting your account with tight risk management is essential.
Step Two: Open an Account with a Spread Betting Company that Allows Small Position Sizes
Due to the amount you are able to risk per trade, you need to find a broker that is able to offer you small position sizes. Some brokers don’t allow you to have positions with less than £1, so you need to research this in detail and choose one that allows the smallest position sizes possible with the tightest spreads.
I’ll compare spread betting companies in my next post and I’ll include the data here when it’s complete for future readers.
(I have only managed a City Index Review at the moment, but I will be adding more as I get time. Make sure you check it out.)
Step Three: Do Not Contend
With the first two, somewhat generic (but essential), steps out of the way, I can share with you some of the more unique traits that I bring to my trading from my practice of martial arts and taoism. Don’t worry, you don’t have to practice either to make sense of them.
Since the Sage does not contend
No one can contend with the Sage
This is an excerpt from the Tao Te Ching and when applied to life can be interpreted as going with the flow of things and being like water in the face of all adversity.
In trading terms, it’s simply the skill of following the trend. It’s the ability to stop trying to predict ‘tops’, ‘reversals’, ‘bottoms’ or anything else that is against the wider world view, the market trend and the general unstoppable force of the markets. It is the knowledge that you can’t spin the world the other way, so just go in the same direction.
For me to enter a position, a single trade not only has to be ‘trending’ in the right direction relative to it’s recent price action and my chosen time-frame, it also has to be moving in the right direction relative to the rest of the world and human sentiment. I talk about this in my post on trading with intuition if you want a refresh.
The basic principle is that no matter how much news, reports, commentary, twitter chat or anything else you consume, none of it is an indicator of future price action. Therefore, better to just trade with the flow of things as they happen. The challenge, of course, is knowing when to jump in.
Step Four: Develop Your Sense of Knowing That Enough is Enough
I used to hang onto my trades until they reached a multiple of my total risk eg. 3 times my risk (£5 risked, take profits at £15). The reason for doing this was so that my profits would outweigh my losses if I say, traded 10 times, lost 6 and won 4. In the 6 I lost, I’d lose £5, and in the 4 I’d win, I’d profit £15 per trade. This would mean that I’d cover my losses and make some profit, even though I lost more trades than I’d won.
But the thing is, you don’t have to be greedy. It’s alright saying ‘hold onto your winners’ and ‘run them as long as you can’, but the truth is, knowing that enough is enough is always enough too. Basically, if a trade is showing a profit and for whatever reason you want to take those profits, take them and move on.
Taking profits is not only good for your bank, it’s also good for your mental health and make no mistake, your mind is the most powerful tool you have to help you trade well.
If you’re questioning the idea of taking profits too early for the reasons mentioned above about success rates then consider this; in the last 6 months I’ve traded, when I’ve intuitively pulled out of trades showing small profits, I’ve prevented myself from larger losses as positions turned against me and contributed to a healthier state of mind whilst sharpening an in-built trait that we all have, even you – intuition.
The thing that hardly ever gets mentioned in trading is the use of intuition and instinct and the mind’s endless capacity to continually develop it. Learn to trust yourself, even when you’re wrong. Sometimes things go good. Good. Sometimes things go bad. Good too.
Step Five: Slow Down
This one is so so important for small account trading.
You have to believe that there is no rush. There is no hurry. Just like my little duck above knows it, you should too.
Now I know you might want to make X per month or turn Y into Z within so many months because I was exactly the same. But the thing is, when you have a small account, you have to accept that your road to financial abundance and freedom is going to take a little longer. But don’t worry, you will get there because if it’s in your nature, it’s in your nature and as long as you go along with it without trying to force it, you will get there.
Accept this willingly in both life and in trading and all the other mental and emotional challenges and fears will subside because without the grasping urgency and desire for quick success and profits, you’ll settle into a more natural way of things. Settling into a trading style free of urgency and necessity and other ego-driven facets will allow you to slow down and start enjoying your life too.
Don’t ever forget this, because beneath the trades and the money and the success there is a life for you to live that you will only ever get the opportunity to live once and if you don’t slow down to experience it, you will get to the end of it as a successful trader and find yourself asking whatever happened to your life.
No matter what; Trade well. Be happy.