Best Trading Strategies for Small Accounts

Sponsored Content – Trading small accounts can be profitable! Simpler exchanges Allison Ostrander discusses three options strategies ideal for trading small accounts.

There are many reasons why you might be trading a small account. Maybe you don’t have a lot of capital to work with or just want a secondary source of income. Or maybe you are building investments for your children.

Whatever your reasons, knowing small account trading strategies can be a great advantage in building 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 it and you can do it too. Here are some things you should keep in mind when trading, and some strategies for smaller accounts that I have personally found useful.

Risk Tolerance Trading a Small Account

The first thing to ask when trading an account is, “What is my risk tolerance?” Determining your risk tolerance is basically determining how much of your account you are willing to lose. Being clear about the limits of risk helps keep emotion out of your trading. Emotional trading can be costly, especially when trading a small account. At Simpler Trading, we always recommend building your risk tolerance into your business plan.

Now, risk tolerance can be viewed in two different ways: the risk for individual trades and the risk for your overall account. Traders who follow my class or who have traded with me know that I have a 25% rule, which means that I do not trade more than 25% of my account in new trades.

Let me explain. I don’t put all 25% of my account into a new trade. I divided this 25% into several trades. For the rest of my account:

  1. I leave 25% for the management of a new job that may be delayed.
  2. Then I leave the remaining 50% completely untouched. That way, if I lose all 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 funds in reserve in case things go wrong. Remember that 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 you.

Now, of course, this approach differs from person to person. You may feel comfortable risking more than 25% of your capital…or your comfort level may be less. It’s up to you to decide what you can tolerate. This will be the basis of how you trade from then on.

Options: a great way to start trading a small account

Once you understand your risk tolerance, 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 calls and long puts

Long calls and bets can really help grow 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 predictions are wrong, the option expires 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 30 days. These can cost between $2 and $5 per contract. If you have a $1,000 account and only risk half of it, a long call worth about $2 would still be within your risk tolerance on a contract. In fact, it would only be a $200 contract. You would then still have capital to consider another job in another sector. Or you can trade another symbol with a different setup on a different chart.

Long calls and bets allow for solid profit potential, but can also get expensive, especially if we’re talking about larger symbols like Amazon (AMZN) or netflix (NFLX). You might be inclined to trade smaller symbols, but that can also mean there is less volume and therefore less interest. So keep in mind that you are going to have to approach the auction, or ask.

Best case? You get an upside spike on the trade, which gives you a nice profit on a rather low risk!

Vertical spreads

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 (which makes it “vertical”). Whether it’s a debit or credit spread, it can always be a great way to take directional moves without risking so much capital.

For example, you might have a long call that costs $30. With a $1,000 account, it wouldn’t make sense to go into this trade. However, a 10 point long debit vertical spread is only $3.50 per contract. So instead of paying a cost base of around $3,000, you only pay the cost base of $350 for each contract you enter into. It greatly reduces the risk while 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 provide lower risk and higher reward trading. They are a little 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 that charting is important for all account sizes!

All in all, 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 chart, you’ll go blind – even if it works, you won’t know any techniques or have any valuable information about why it worked. The only way to create an effective long-term trading strategy is to learn from every trade and create improvements every time.

Working with a trading mentor and learning how they plot (and execute) their setups can be very helpful. That’s what I love about Simpler Trading… I truly believe the live trading rooms and hands-on trading education make people better traders.

If you want to know more about our courses and our mentorship, you can find us at SimplerTrading.com.

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