Every one likes to trade a with a well funded trading account. That is an account with $1,000,000 or more. But only a few people can do this. Most traders do not grow very much they are stuck with relatively small trading accounts.
Option Traders have the best results when they sell options and receive option premium. When you trade a small account it requires very strict risk management, that is money management. You can not enter positions and you have to limit your position size. You can not risk big losses.
For example, if a trading account only covers its required margin by $5.000, and it takes a $6.000 loss, the account will become untradeable until additional money is deposited.
Trading a Small Account
Trading a small sized account is much more difficult than trading a large account. Large accounts can have some loosing trades, they are buffered against mistakes, as well as unexpected losing streaks. People that have small accounts do not have such a buffer. Large accounts can be used to trade expensive stocks, but small accounts can only be used to trade stocks. Large accounts also allow more flexible trading (e.g. multiple contracts), whereas small accounts are very limited.
In addition, trading a small account has psychological issues that make it even harder to trade the account well. For example, when a trader knows that they can only afford a single losing trade before you have to stop trading. Because it will know longer cover its required margin, the pressure to make a profitable trade is enormous.
Even the best traders have losing trades. There is nothing that can be done to avoid losing trades. A trader has no control over it. This will add to the psychological stress.
If you have a small account you can only buy a few (expensive) stocks. With options you can controls 100 shares even expensive share with little money
Advice for Small Accounts
With all of the disadvantages, it appears as though it is not possible to trade a small account profitably.
This is not the case, and small accounts are traded profitably by many traders. The following advice is provided from the perspective of under capitalized accounts, but the advice actually applies to all trading accounts (even the $1,000,000 accounts).
- Trade options – You can enter trades with high probability of profit.
- Trade small – Do not risk more than 5% of your capital per trade.
- Define your risk – Vary the number of contracts but try to risk roughly the same amount of many in each trade. You may choose defined risk trades.
- Trade often – What is trade often? Have at least 5 different trades in the game.
- Manage early – Manage early is more profitable than let your winners run. If you can close the trade and make between 25%-50% do it. Better take risk of the table and a small profit in your pocket than to see your potential profit grow smaller.
Some traders adamantly state that small sized trading accounts cannot be traded successfully. This is not true. Small trading accounts may be more difficult to trade successfully. If they are traded correctly, there is no reason why small trading accounts cannot be profitable.
We sell options to receive option premium. We use many defined risk trades using several strategies. By varying the spread size we know exactly how much risk we take. It can range from $50 to $750 per trade, whatever suits your portfolio size best.
By controlling the risk by order entry and focusing on taking profits early small account traders can make a good living from their trading, and may be able to turn their small account into a large account.