As a new trader, I had enough money socked away to make a decent-sized trading account. But as my newness, and ignorance took control, I quickly had a small account. I had blown out all my money learning. At that point, I knew how not to lose, but I didn’t have any money to continue.I spent several years of my trading learning experience taking small amounts of cash from my day job and trading with that. Consequently, I got pretty good at trading a small account. Trading a small account takes different skills than trading a large account. Most of those skills involve risk management. We’ll take a look at those in this class.
What is a Small Account?
Let’s start by defining a small account. A small account has different definitions depending upon your trading instrument. I’m going to draw a line in the sand here and say that a small account is one that is less than 10,000 times the smallest per pip (tick) increment of the instrument you’re trading. I’ll go into a bit more detail regarding that in a moment, but a small account is one in which you cannot properly use all the money management tools in your toolbox because you don’t have enough margin in your account to handle it.
To calculate my definition of a small account. Let’s look at the EUR/USD for a moment. In general, on the MT4 platform, the minimum trade size is 0.01 standard lots – a microlot – or 100th of a standard lot, 1000 Euros. The value per pip in USD (I know not everyone enumerates their account in USD. I will however use USD for all of the examples in this class) is $0.10. So, roughly multiply that by 10,000 (=$1000) to get an idea of what I consider large enough to easily maintain your risk parameters (for EUR/USD trading.) Anything smaller than that, I would consider a small account. I know that a $1000 is still a pretty small account, but you should be able to use proper risk management in an account of that size.
Of course, if you’re trading, for example, Mini-Dow Futures (YM), the smallest tick is $5 per contract, so, multiplied by 10,000, you will need $50000 minimum to maintain your risk properly. For the YM, I would consider anything less than that to be a small account.
Another example might be the eMini S&P (ES), with a $10 per contract minimum. So, you should have at least $100,000 to consider this a large account.
And, of course, you are stuck with a minimum of $25,000 in the US for stock day trading minimum capital.
Risk Management is what makes it tough trading small account
That’s not to say that you can’t trade these instruments with smaller accounts. I think you can probably easily trade the futures with accounts as small as $10,000. But to do so, you will have to have strategies that allow for the fact that you can’t have 1/10th size increments for building and reducing positions and so on.
For the purposes of this class we will only be discussing forex.
Patience is the important factor when trading a small account
PATIENCE! Since you cannot size your account down as much (relatively) with a small account, you have to be sure you can get the best entries possible. Getting the best entries requires patience, patience and more patience. That is how to grow a small trading account.
If you have a larger account, you can enter experimental positions with, say, 1/10th of your normal size to see how it does. Your profit will be smaller, but so will your loss. With a small account, you don’t have that option (unless you have a broker that will allow it. More on that later.)
Small Account Strategies
Develop your strategies such that you maximize your entries and reduce your risk and help in growing a small forex account. For example, holding out until the very last second on a reversal trade serves two purposes:
- You will get a better price before the reversal occurs.
- You will reduce your loss if the price doesn’t reverse.
As you know, I use the bullet strategy on reversal trades. Since, for the purposes of example, I’m trading a small account, I have limited options for sizing the trade. I can only go in half size (my normal position size is 0.02 lots), then if I want to increase my subsequent bullet size, my only option is to double the size, which approaches gambling (doubling down.) The result of doubling increases the risk dramatically and can cause relatively huge losses if price action doesn’t reverse in due time.
The rules I use for our Momentum trade are designed for a small account. With a larger account, I would enter a position using a market order right when we get our momentum signal and all criteria are met (the Momentum Strategy Checklist.) I would use a smaller size (½-¾). If the price never pulled back to the 20 SMA, we would have some profit from the trade and we would have capitalized on the impulsive move. If it did pull back to the 20 SMA, I would add a larger size (say 20-25% increase over “normal” size) and let the trade run using whatever loss exit and take profit plans worked well. That way, we get profit if it doesn’t pull back and we get more profit if it does pull back. The sizing of the positions would ensure that we minimize our loss in the case that it never goes our way.
Since our account size doesn’t allow us to manipulate the trade sizes that way (remember our minimum size is 0.01 lots), we have to use the best possible scenario – the pullback to the 20 SMA – even if it means we will miss some trades because the price never pulled back to there.
Missed Trades is the penalty for Patience
So, the penalty for patience is missed trades. Yes we will miss a few trades, but the ones we get into will have greater possibility for reward and smaller risk if price goes against us.
The reversal rules are also optimized for small accounts. Our “Reversal Min” number ensures price has moved sufficiently for a reversal. My interpretation of the H4 move is also designed to ensure an imminent reversal. And lastly, the experimental 15 min RSI(8) divergence is also designed so we can be sure to get our reversal without adding additional positions.
Learn to Read Price Action
In addition to our trade rules, you should be particularly conscious of the price action. Watch for stalling and reversal signals to get in or out of trades at the right time. Recognizing these price action signals requires time and experience. Plus, if you’re going to trade using price action signals, be sure you know yourself. Don’t allow yourself to be scared out of positions just because price might be going against you. Be sure that you are seeing real price action signals (pin bars, rejection wicks, price movement as it approaches support and resistance zones, etc.)
Trading a large account is MUCH easier than trading a small account. That may seem obvious, but it’s not really for the obvious reasons. When you trade a large account, your trade size is larger and can be more easily split incrementally. For example, if your normal trade size is 0.02 lots, you can split it in half and that’s it. But if your normal trade size is 0.20 lots, you can split that 20 ways. You can enter a trade ½ size and add 10% for each additional position. Or you can enter ¼ size and add 20% for each additional position. In either of these cases, you will not be up to your full size for many positions. If you want to be able to do that and you don’t have enough trading money, you can open a small account with the broker Oanda (there may be others of which I’m unaware.) Oanda will allow you to trade in increments of one unit of currency. That’s 1000th of a microlot.
Some Brokers Allow Smaller Trade Increments
The downside to trading with Oanda is limited leverage. US accounts will only get 50-1 leverage (I have 1000-1 with Trader’s Way). Non-US accounts get 100-1 leverage. 100-1 is better, but still tough to put on many positions. BUT, if you use my arbitrary 10,000 multiplier, you will find that you only need $1.00 to have a “large” account with Oanda (1 unit of EUR/USD is $0.0001 per pip.) While I was floundering in my trading, I was able to trade with Oanda and gauge my learning using $100 trading accounts. Of course, making $0.02 on a trade seemed counterproductive, but it was more real than trading a demo account. I was, however, very happy that I could do forex trading with 100 dollars.
If you want to use MT4 with Oanda, you’re still relegated to a minimum of 1 micro lot. But Oanda now includes TradingView charting, so you can trade directly from very nice charts and still use single unit trade sizes.
These are just a few things to remember when you are trading a small account. The most important thing to remember is patience is the order of the day when trading forex.
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