6 trading strategies for small accounts

Easy access to markets through online brokers and spread betting has opened up the world of trading like never before. And many of us who never would have thought it was possible for us, have been able to speculate on the markets and make money.

But … trading a small account has its frustrations.

We come up against margin requirements … minimum stake sizes … and – most frustrating of all, given the amount of work we put in – profits that wouldn’t buy a round of drinks.

So, how do you keep motivated, when your carefully planned and managed trade romps home with a £10 win?

In these early days, it’s important to think in percentages, rather than in £s. If that £10 win represents 2% of your £500 bank, that’s a great result. Your bank won’t always be £500. When it’s £5,000 … or £50,000 … you’ll be very glad of your ability to bring home a 2% win!

Of course, compounding is the friend of the small account, but with these other strategies, you can ensure your small fund grows into something impressive …

The 2% Max Compounding Strategy

This means that you’ll only ever risk a maximum of 2% of your trading account on any one trade. To be safe, I’d prefer to see that at 1%, but I appreciate that can bump you up against your broker’s minimum staking levels.

So, if your trading account is £1,000, and you’re risking 2%, that’s just £20 risk per trade. If your stop distance on the trade is 40 points, that’ll mean a stake of 50p.

That may sound like small fry, but with a small fund, your primary goal must be to stay in the game. Don’t focus on making your first million or lounging on a beach in the Caribbean. Instead focus on still being in play in 12 months’ time. That’s how real fortunes are made.

If I had a tenner for every time someone had told me that they’d reduce their risk-per-trade to a sensible level once they’d built up their account a bit …

I know it’s tempting to take a punt with some big positions, because (if they pay off) it’ll give you a nice leg-up to kick of your trading career. Unfortunately, this notion is more likely to be the nail in your trading coffin.

You might have a good start … you might even double your £250 bank … but ultimately, over-staking will (at best) leave you having to top up your account, or (at worst) wipe your account out completely.

Or to put it another way, as you increase your percentage risk per trade, you increase the likelihood that you will wipe out your account. Too much risk almost always ends up in wiping out your account.

Keep your risk levels low. By calculating risk as a percentage of your account size, as long as you aren’t spending your winnings, you’ll automatically be compounding. So, that £20 risk per trade will slowly grow to £21 … £25 … £40 … and onwards. (With some bumps along the way, of course.)

Add funds to your account

So, you’re being sensible, you’re only risking a small percentage of your small fund … and you’re being patient.

But it’s a slow graft.

Let’s say you started out with £1k, and you’re aiming to make 20% p.a. After 20 years, you’d be looking at £38k. Obviously, that’s nice to have, but is it too greedy to want more?

Well, this is a simple way to massively accelerate that growth …

Add modest amounts to your trading fund each year.

The chart below shows the growth of a £1,000 account over 20 years, with a steady 20% pa return, compared to the same strategy, but adding £600 extra each year (that’s only £50 per month) to your investment account …

This simple habit of adding some very modest extra funds to your trading account along the way, has an incredible impact on returns.

Large-ish Market Strategy

Okay, so now we’re getting to the nitty gritty of what we’re actually trading.

Which markets are best for small accounts?

Many people out there will try to drive you towards penny stocks. Yes, they are cheap to buy, but that doesn’t make them a good choice for small accounts.

Traders of small accounts want to avoid the largest instruments. For example, the Japanese Nikkei, at 30,000 is going to demand a wide stop distance and a hefty margin. Likewise the Dow Jones.

But that doesn’t mean we should rush to small ones. Smaller shares and more obscure markets tend to have steep trading costs, excessive volatility, and high minimum stake sizes.

While it can be exciting to hunt out trades on obscure instruments or undiscovered gems, it’s incredibly difficult to turn a profit if a huge chunk is paid in spread. Take USDMXN, for example, which has a spread of 50 pips on my broker, compared to EURUSD, which is just 0.6 pips.

We’re looking for some middle ground, with a low spread cost, and comfortable minimum stake, and more predictable volatility.

There are plenty of major forex pairs and global indices which fall into this category.

Mid-Range Swing Trading Strategy

This strategy is about the timeframe we’re trading.

Just as small account sizes are often driven towards shares that are too small … they are also drawn towards scalping strategies.

I can see why … A scalping strategy might have a stop distance of just 5 pips. So, with your minimum stake size, you could use small stakes and take tiny risks on each trade. That’s what we’re meant to be doing, right?

Problem is that, even if you’ve carefully chosen a market with a nice cheap spread of just 0.6 pips – that’s still 12% of your market move eaten into by paying your broker. Believe me, your broker is rich enough!

At the other end of the timeframe spectrum are long-term trades. By contrast, these will have wide stop distances of 100s of points. Even at minimum stakes, they will demand a larger account size if you’re going to stick to the 2% Max Strategy.

Again, it comes down to finding some middle ground between these two.

Swing trades tend to be open for a few days at a time and take advantage of the mid-scale moves as the market progresses along longer-term trends. This doesn’t mean day trading is out of the picture – just avoid the tighter scalping side of this practice.

I recommend hourly, 4 hourly or daily charts, depending on the time you have available and what kind of restrictions your account size puts on your minimum stake levels.

Strong Success-Rate Strategy

So, we’ve covered our risk, our staking, which markets we’re looking at, and what charts we’re trading off. Next I want to look at what we demand of our strategy in terms of performance.

Try not to allow your head to be turned by big profits. The most profitable trading strategies are often the most difficult to trade with a small fund, as they tend to have volatile returns.

Smooth returns are the friend of the compound investor, and that’s especially true when you have a small fund that you need to protect. This often means looking for a less ambitious reward-to-risk ratio, in favour of a higher success rate. Lots of small wins will give you a steadier journey, than long losing runs followed by a big win.

Learn-as-You-Earn Strategy

As I’ve already mentioned, our primary goal with a small fund is to protect that fund. If you find yourself at the end of the month with 0% gains, you should view that as a positive. You’ve gained practice and experience in the markets, and it’s cost you nothing.

This is how you learn, get better at trading, and ultimately become a successful trader.

A small trading fund is a great way to gain an education in the markets. It gives you flesh in the game, so you learn what it’s like to take losers and winners. However, owners of small accounts run a risk of not taking their track record seriously enough.

If you lose £20 here and there, it might mean very little to you. But that doesn’t mean you should ignore what went wrong in those trades. If you can gain knowledge now, while trading with small stakes, it will stand you good stead when the stakes get higher.

Take the 1% of your £1k account as seriously as you’d take 1% of a £50,000 fund. If you’re not taking it seriously, you’re not going to learn from your mistakes. A small account is the perfect way to get started and learn from errors, but it will never become a large account if you’re not learning, improving and taking every profit seriously.

‘Start where you are. Use what you have. Do what you can.’
Arthur Ashe

Please don’t be put off from trading if your account size isn’t ‘big enough’. Waiting until you’ve got more money is a false economy. When you’ve more money, you can add to your funds, and you’ll already be a wiser trader!

A small account shouldn’t hold you back in trading. Nor should it stop you having ambitious goals for the future. Yes, it’ll take time to build, but learning and watching that growth can be part of the pleasure.

 

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