Best Trading Strategies for Small Accounts
Sponsored Content – Small Account Trading Can Be Profitable! Simpler exchanges Allison Ostrander discusses three options strategies that are ideal for trading small accounts.
There are many reasons why you might be able to trade on a small account. Maybe you don’t have a lot of capital to work with, or you just want a secondary source of income. Or maybe you are building investments for your kids.
Whatever your reasons, knowing small account trading strategies can be a big advantage in generating wealth.
Trading a small account can be very rewarding, although working with less capital can sometimes be a bit more difficult. Many traders have done this and you can do it too. Here are some things you should keep in mind when trading and some small account strategies that I have personally found useful.
Risk tolerance Trading on a small account
The first thing to ask yourself when trading on an account is, “What is my tolerance for risk?” Determining your risk tolerance is all about determining how much of your account you’re willing to lose. Being clear about the limits of risk helps keep emotion out of your trading. Emotional trading can be expensive, especially when you are trading a small account. At Simpler Trading, we always recommend incorporating your risk tolerance into your trading plan.
Now, risk tolerance can be looked at in two different ways: risk for individual trades and risk for your entire account. Traders who take my course or have traded with me know that I have a 25% rule, which means I don’t trade more than 25% of my account in new trades.
Let me explain. I am not putting all 25% of my account in a new transaction. I have divided this 25% into several trades. For the rest of my account:
- I leave 25% for the management of a new profession which risks falling behind.
- Then I leave the remaining 50% completely intact. That way, if I lose all of my new trades, or just had a bad month, I still have 50% of my account left to strategize and recover.
Trading is all about endurance and you need some reserve funds in case things go wrong. Remember, even the best traders lose. This is especially important if trading is your full time job. No matter what goes wrong, you still want to have enough capital to pay yourself.
Now, of course, this approach differs from person to person. You might feel comfortable risking more than 25% of your equityâ¦ or your comfort level may be lower. It is up to you to decide what you can tolerate. This will be the basis of how you will trade from this point on.
Options: a great way to start trading a small account
Once you understand your tolerance for risk, you can then determine how you want to trade. Options are a great trading strategy for small accounts because the barrier to entry, as well as the risk, is lower. Let’s go over some of my favorite ways to trade options with small accounts.
Long call and put options
Long calls and puts can really help build a small account. As a reminder, long calls allow you to buy at a predefined price in the future; long put options allow you to sell at a predefined price. Long positions are great because if your forecast is wrong, the option will expire and your losses are more manageable.
Just note that when trading a small account you may need to find symbols with a smaller underlying asset price to stay within your risk tolerance.
I’m going to give you an example. Sometimes assets have long calls that last for 30 days. These can cost anywhere from $ 2 to $ 5 per contract. If you have a $ 1,000 account and you’re only risking half of it, then a long call worth around $ 2 would still be within your risk tolerance on a single contract – in fact, it wouldn’t be. than a $ 200 contract. You would then still have capital to consider another profession in another sector. Or you can trade another symbol with a different setup on a different chart.
Long calls and puts offer solid profit potential, but can also get expensive, especially if we are talking about larger symbols like Amazon (AMZN) or Netflix (NFLX). You might be inclined to trade smaller symbols, but it can also mean that there is less volume and, therefore, less interest. So keep in mind that you will have to approach the offer, or ask.
Best case? You get an upside spike on the trade, which gives you a nice profit on a rather low risk!
When long calls and puts are too expensive to trade, vertical spreads can come in handy. As you may know, vertical spreads occur when you buy (or sell) the same type of option with the same expiration, but using different strike prices (this is what makes it ‘vertical’). “). Whether it’s a debit or credit spread, it can still be a great way to take directional action without risking so much capital.
For example, you could have a long call for $ 30. With a $ 1,000 account, it wouldn’t make sense to get into this business. However, a 10 point long vertical debit spread is only $ 3.50 per contract. So instead of paying around $ 3,000 base, you only pay $ 350 base for each contract you enter into. This greatly reduces the risk while still allowing you to make an upward directional movement.
Although the amount of profit you can make is limited by the spread since it is vertical, this trading strategy still allows you to profit from a trade that might otherwise be out of reach.
Iron condors and butterflies
To take advantage of vertical spreads, Iron Condors and Butterflies can also be effective strategies for trading small accounts – they can generally allow for lower risk and more profitable trading. They are a bit more involved because your position is actually a balance between four contracts: long call, long put, short call and short put. These can be great ways to consolidate your charts and are definitely worth investigating as part of your small account trading strategies. Iron condors, for example, are useful in choppy markets or for trades where you have a goal in mind with an underlying asset price.
Remember, charting matters, for all account sizes!
Overall, whatever strategy you use to trade your small account, your chart setup really matters. The chart always comes first before initiating a trade. If you don’t focus on the right mapping you will go blind, even if it works, you won’t know any techniques or have any valuable information as to why it worked. The only way to create an effective long term trading strategy is to learn from each trade and create improvements each time.
Working with a sales mentor and learning how he plots (and executes) his setups can be very helpful. This is what I love about Simpler Tradingâ¦ I really believe that live trading rooms and hands-on trading education make people better traders.
If you would like to know more about our courses and mentoring, you can find us at SimplerTrading.com.