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In this episode, you’ll discover the mistakes you must avoid when trading a small account.
So tune in right now…
Resources
Trading Psychology: 6 Practical Tips to Master Your Mind and Money
Is $1000 Enough to Start Trading?
How to Create a Trading Journal and Find Your Edge in the Markets
Transcript
Hey, hey, what’s up my friends?
Welcome back to today’s episode where I’ll be discussing the mistakes that you want to avoid when trading a small account.
Mistake #1: Thinking in terms of dollar amount
I get it, most of us with myself included, started off with a really small account. And the first mistake that many traders make is they think in terms of the dollar amount.
Let’s say for example, you put in $100 into your account. Maybe you make a trade and you earn $10 on a trade.
So you start wondering to yourself, “I’ve taken so much time and effort to learn all the trading stuff out there, the MACD, the RSI, the chart patterns, the price action for just $10 on this pathetic trade. Man, I’m wasting my time. I want to work at McDonald’s instead.”
Now here’s the thing, if you focus on the dollar amount, then yes, it can be insignificant. $10 can’t even get you a meal at a restaurant. But I don’t want you to focus on the dollar amount.
I want you to put things in perspective and look at it in terms of your risk to reward. Let’s say for that trade, you risk $5 to get back $10, then that’s a risk-reward of 1:2.
Or if you put it from a percentage perspective, that’s a return of 10% on your capital invested. That’s pretty decent. But if you only focus on the dollar amount, that pathetic $10 then yes, you’re going to feel horrible about yourself.
But remember, your account size isn’t going to be $100 all the way. You’re going to scale up eventually when you become consistently profitable and confident, from $100 to a $500, or $1,000 or a $10,000 account.
This time around when you do a 10% return, you can see how the dollar value changes significantly. When you’re trading a small account, don’t focus on the value. It’s going to make you feel horrible.
You’ve got to change your perspective, look at it in terms of percentage, and look at it in terms of your risk-reward.
Mistake #2: Not adding funds regularly
When trading a small account, traders think that’s the end-all, be-all and they think, “I’m going to take this $200 trading account and I’ll turn it into six figures, and then I can quit my job, go to the beach to sip pina colada and retire.”
That’s ridiculous. The odds of that happening is slimmer than playing the lottery. So you don’t want to just have a small account and just trade it as it is. You want to add funds to your account regularly over time.
Let me give you an example of why this is powerful. For example, you have a $1,000 trading account and you do an average of 20% return each year. After 20 years, that $1,000 account will be worth about $38,337.
Now this time, what if you were to add $1,000 each year to your initial $1,000 trading account? It’s about like $80, $90 a month if you think about it. Again the same thing, you compound it at 20% return a year.
After 20 years, your account will be worth $262,363. Can you see the difference? One previously, it was about $38,000 and now for this, we have about $262,000 by just regularly adding funds to your account each year. That’s the power of compounding.
That’s how you get out of trading a small account. Not by trying to make that 1% or 2% to snowball over time. Yes, you can do that, but if you really want to see big money being made, you got to be willing to add funds over time to your account.
Next…
Mistake #3: Not treating your small account seriously
When traders trade a small account, they don’t treat it seriously. They think, “It’s only $100 or $200, I can afford to lose that.”
Now here’s the thing, if you have that mindset to start with then eventually when you trade larger amounts like $1,000, $5,000 or $10,000 then that mindset will be brought along to your larger trading account, that mindset will be the same.
And those bad habits and thought process of yours that you bring over to your larger account is going to be a disaster for you. Yes, I know the account size is small, but you got to trade it seriously.
Because if you don’t nail down the thought process correctly, all those bad habits, all those mindset will be brought over when you trade a larger amount of money where the damage will be even more painful.
Mistake #4: Not paying attention to commissions
This applies less to forex traders, but more for stock traders. From where I’m from, in Singapore, you’d be amazed to know that the brokers here still charge an average commission of about $20 to $25 per trade.
For example, if I buy 100 shares of one of the local stocks, let’s say Singtel, I’ve got to pay around $20 to $25 to buy, and that’s the commissions to the broker. And if I sell, then I’ve got to pay another $20 to $25.
So if you have a $1,000 account, you’ll pay $25 in commission when you buy a stock, and you’ll pay another $25 in commission when you sell a stock, that’s a total of $50. That’s about that’s about 5% down from your trading account. This is from Singapore’s perspective.
But if you’re trading in the US, you’ve got Robinhood and the other brokers which have almost zero commission costs. That’s fine for you.
But beware, for the people from other parts of the world, if you’re trading stocks, commission is still a very real thing. You’ve got to take that into consideration.
Because again, if you have a $1,000 account and you’re paying $50 Commission, it’s gonna be darn difficult to even breakeven on the account. And the more you trade, the faster your trading capital is going to get eroded.
So pay attention to the broker that you’re choosing, pay attention to the instruments that you’re trading, pay attention to the transaction costs as a percentage of the capital that you’re trying to invest or trade with. That’s important.
Mistake #5: Not learning from your mistakes
Many traders don’t learn from their mistakes. They think because it’s a small account, they can afford to lose it, average into losses, widen their stop loss.
As I’ve said earlier, if you have that mindset, If you don’t learn from your mistakes, if you keep making mistakes when you’re trading a small account then when you trade a larger account in future, the mistakes are still going to be there, you’re not going to change.
What makes you think that you’re going to change just because you’re trading a different account size? No, that mindset, that thought process, the bad habits are all going to be carried over when you trade a larger account. And that’s when disaster strikes.
That’s when you’re hurt and money vaporizes just like that. That money could be better spent on your family, etc. So don’t treat this like a game.
I know that the money that you’re trading might be small, but whatever mistakes that you’re making now, whatever bad habits are you doing, fix it now while you’re still trading a small account.
If you don’t fix it now, you’ll never fix it at all. Treat this as a business.
Here’s a quick recap…
Recap
- Mistake #1: Focus on the dollar amount. Instead, focus on your percentage return and your risk relative to returns.
- Mistake #2: Not adding funds regularly to your account.
- Mistake #3: Not treating your small account seriously.
- Mistake #4: Choosing the wrong broker and the wrong instruments for the given account size.
- Mistake #5: Not learning from your mistakes.
So don’t let these happen to you. I know if you’re reading this, you’re serious about trading and this is not gonna happen to you.
With that said, I wish you good luck and good trading. Until next time.