Pimp My Trade

Tips for Trading a Small Account

Posted on May 8, 2009 by Adam

I started out with next to nothing in my trading account. When I was 18, working my first real summer job, I deposited part of my weekly paycheck into my brokerage account. When I finally worked up the minimum amount ($2000) I was delighted, only to find out I was pretty limited in terms of what I was able to do. Buying 3 shares of anything just wasn’t going to cut it.

My account has grown immensely since then, but the skills I learned during that “sandbox” period not only got me started, but they continue to serve me well today.

Learn to Trade Options

The principle of leverage means that you will be able to do a lot more with limited capital. For example, a 10% move in a stock could result in a 100% or even 200% return in the option, depending on which strike you choose.

That’s how I got my start in option trading. Why spend $200 plus commissions to buy yourself 2 shares of the stock you want to trade and make $20, when you can spend $100 to buy one option contract that could potentially double in value on the same move? It’s almost a no brainer, but not many people realize how awesome options are!

When you get better and your account grows, you can try your hand at some of the cooler options strategies out there.

The Pro Trader Course is an excellent resource if you want to learn to trade options. There’s an entire chapter devoted to options alone! If you prefer a quick overview, you can read this article or have a look at the options cheat sheet.

Trade Less Often

You don’t want to overtrade any time, but if you have a small account to begin with, commissions will gobble up any progress you make. Give your trades a little more wiggle room - both to the upside and downside. This may mean using a wider stop, but a small adjustment in risk tolerance may prevent dozens of whipsaws.

Not only will you save yourself some commission money, but you will learn discipline and patience. Good stuff.

Diversify Intelligently

You have limited capital to work with, so you can’t exactly mirror the S&P. The size of your account will be highly correlated with the trades you make. If you manage a book of 10 positions and they are all bullish, a big selloff won’t just hurt you - it could wipe you out.

I once read an article that said a well diversified portfolio should contain 5 stocks from each of the 9 sectors. That’s absurd! Not only is it impossible to execute that with a small account, but managing 45 positions is even hard for anyone. You would be far better off buying an index fund.

Smart diversification means keeping balanced in terms of your longs and shorts. It also means not getting too overexposed to one sector.

Let’s say you have an overall bullish bias. In particular, you are bullish on technology. You are bearish on retail and healthcare. Obviously, you wouldn’t want to go out and buy 10 tech stocks. Nor would you want to short 10 retail or 10 healthcare stocks. A properly diversified small portfolio would include a one or two of each - and some other good setups. Out of 10 positions, maybe 6 or 7 would be bullish.

Trade Leveraged ETFs

Be careful with these - when they move, they move. However, if you are unable to trade options or short stock, these may be your best alternative. Many of these funds are inversely correlated to the instrument they track, allowing you to effectively “short” stocks without actually doing it. Since they are leveraged, you don’t need as much capital to take a positions. However, you should be prepared to see wild swings when you deal with these things.

Check your Balls

I sat here for 5 minutes trying to think of a more polite way to say that, but I couldn’t. My point is, you don’t have much money, so your account value may fluctuate by a fair amount day to day.

You have to be prepared to handle that kind of volatility - at least until you can grow your account substantially.

You should never trade with money you can’t afford to lose, and that’s rings true for the little guys. Blowing up an account is no fun (suprisingly, I’ve never done it, but I’ve heard stories), but let’s face it: you are undercapitalized. You can’t really lose that much since you didn’t start with a whole lot.

Try not to get too emotional about swings in your account value. When you are up (and you will be), you will feel ecstatic, and when you are down, you will feel horrible. Just realize that it’s all part of the game and you will have to get through it in one piece.

Good luck making money!

Uhh, what can I get for 83 cents?

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