You have to mange your trading risk, or the lack thereof will kill your savings.
Hey guys, it's Will here and while classic financial theory would suggest that the same portfolio-optimized risk management strategies would apply regardless of portfolio size, the real world is harsher and more complicated.
This difficulty is exacerbated if you are an aggressive day trader seeking maximal capital appreciation.
Determining Small vs. Large Accounts
"True Religion Apparel From $0.67 to $31 a share $TRLG$" Are Penny Stocks Good To Trade?
$0.67 to $31 a share (this is not an income claim)
Your definition of a small or large trading account should differ from mine depending on your financial circumstances and trading style.
However, for the purposes of this guide and those who use an aggressive day trading strategy, we will consider any trading accounts under $9,000 to be small accounts.
Of course, people with less than $9,000 are the most vulnerable to the problems associated with small account trading, but they still apply to some extent up to $9,000.
The Small Account Trader's Objective
When compared to the aggressive day trader, the great majority of equity market participants have completely different goals.
Most people are saving for retirement and taking advantage of compound interest. Perhaps they require a place to park their money in order to offset the buying power loss caused by inflation.
You as a day trader, on the other hand, have a very different goal.
Because you trade micro price movements in hot stocks on both the long and short side, their results are largely uncorrelated with the broader stock market.
Day traders, particularly those with tiny accounts, want to fast expand their account size by taking aggressive risks.
Most day traders with $9,000 accounts aren't looking for a comfortable 5% return on their investment. The time invested simply does not correspond to the monetary return.
The Reality Of Small Accounts vs. Large Accounts
In actuality, most small account traders do not have a big income or asset basis from which to draw...
...So if they blow out their account, they're out of the game for a serious amount of time.
Large account traders are typically wealthier and, as a result, have a more diverse portfolio of assets outside of their trading account.
Blowing up a huge trader's account may not have a significant impact on their life, and it may not have taken them out of the trading game totally.
They can simply deposit additional money from somewhere else.
For this and other reasons, small account traders are required to manage risk more surgically in order to ensure that they are always in the game while also maximizing capital appreciation.
However, they are caught between a rock and a hard place.
Their trading account are a substantial percentage of their net worth, therefore they must protect it.
The reason they started trading is to double their net worth through an aggressive trading strategy.
Large account traders simply do not experience this stress, making risk management considerably easier and more to the book.
Putting a Percentage of Your Capital at Risk
Stop thinking in dollars and cents, which is the most fundamental risk management approach that all tiny traders should employ.
Instead of a fixed monetary amount, think about percentages: risking a fixed percentage of your account on each deal.
As a result, the amount you're risking scales with the size of your account as it grows or shrinks.
It's not only about thinking in percentage gains; it's also about not taking too many risks.
Most trading gurus and books recommend that risking 5% of your account on a single trade is the most aggressive any trader should become, which is probably too high for the majority of traders in most cases.
Your number is a personal decision based on where you're willing to come to the understanding that you could lose your entire account and be okay.
There is a balance between risking more and increasing your account size and risking less, but staying in the game and enabling your transactions to benefit from the standards of big numbers (if you have a profitable strategy).
For small accounts, that compromise is often in the range of 2 percent to 5 percent.
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Selecting The Best Strategy For Your Account
High-risk, high-reward methods like shorting parabolic penny stocks do not meet the risk profile of most small account traders.
In that case, the stock could surge by 300 percent against you, blowing up your account and potentially placing you in debt to your broker.
While there are a million different trading techniques, most of them are based on one of two basic concepts: momentum or mean reversion.
When you trade momentum, you buy what is rising. When trading mean reversion, you buy what is falling because you believe it has fallen too far.
Most mean reversion tactics are ineffective for small accounts.
These are transactions that produce reasonably constant little profits while exposing you to large losses and risks.
As a result, they are much better handled by traders with substantial accounts who can readily sustain some large losses without disrupting their approach.
When mean reversion traders are mistaken, they double down because they believe that "if it was a fantastic value at $17, it's an even better deal at $11."
They can get it wrong and buy on the way down until the stock consolidates around $6, leaving them with massive losses.
The fact that momentum trading is a good alternative for small-account traders is because it's quite simple to recognize when you're wrong and guys cutting your losses quickly is very important.
You're going with the flow. If the trend breaks, you were incorrect and can exit for a minor loss.
In general, momentum traders only add to winning trades, if at all, so you won't face losses with a large position.
You Should Only Trade What You Are Willing To Lose.
I made $1,100 in 30-mins of trading this day and took the rest of the day off and went surfing.
True Story Check It Out Here
Every penny in your trading account should be money that you can afford to lose.
If you're going to need it for rent or groceries, take everything out and only leave what you can lose in 10 minutes and be no worse for the wear.
You can't have one foot in and one foot out. You can't desire to take extreme risks with funds you could require at the same time. You will be sabotaged by your own brain, and you will be unable to weigh market hazards sensibly.
Many well-known Gurus will tell you that you can't trade until you achieve a certain dollar level in your trading account.
Remember that the majority of these Gurus Trading Books are outdated... before the days of free commissions and discount brokers removing minimum deposits and many other expenses.
You can trade with a tiny account, but you should be aware of the added risks that it entails.
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