If you’re reading this, chances are you’re not Warren Buffett, and you don’t have billions of dollars in the bank. Likely, you’re just getting started with trading, have limited funds, and are wondering how the heck to maximize your profits without blowing up your account.
Recommended account sizes can be daunting; and you may often feel left out of popular, pricey stocks. Don’t be discouraged.
There is no difference between $1 million and $100 if you lose more money than you make. The objective is to grow your account by winning trades consistently; and you can get there with a
Kick-start your trading with these helpful tips and need-to-knows for small accounts of
$5,000-or-less. To earn money even faster, download our latest guide to creating multiple streams of income.
Know the rules of the trade
The U.S. Securities and Exchange Commission (SEC) imposes stock trading rules and laws to prevent fraud, reprimand insider trading and maintain equilibrium in the stock market. Individual brokers may also have trading rules, minimum account size requirements, settlement cycles and commission fees you should be aware of. Become familiar with these rules and learn how to navigate them early on to stay out of trouble and keep trading in the long run.
Pattern Day Trader Rule
Every small account holder who wants to day trade should be familiar with the Pattern Day
Trader rule (also known as the PDT rule) which requires anyone defined as a pattern day trader to maintain an account size of at least $25,000. The rule also prohibits traders with an account balance of less than $25,000 from executing more than three-day trades within a rolling 5-day period. For a day trader with a small account, this rule substantially limits how many trades you can take in a given time frame and forces you to be more selective about what stocks you enter.
Common ways around the PDT rule include limiting your trades to three per week; executing swing trades; opening an offshore account or trading with multiple brokers. You might also skip the stock exchange entirely and explore markets with looser restrictions, including cryptocurrencies, forex, futures, options and foreign exchanges.
Margin Rules
Margin accounts allow traders to borrow funds from their brokers to purchase more shares than their cash balance allows. This is called leverage, which can be a helpful way to scale a small account. Margin accounts also permit short-selling and trading with unsettled funds. While using leverage offers more reward, there is also increased risk.
Be cautious when using a margin account and do your own research to understand the pros and cons of leveraged trading.
Note: This is not an exhaustive list of trading rules and laws. We recommend calling your broker and doing your own research to ensure compliance.
Be disciplined
A strategic approach to trading is even more important with a small account because there is less room for error. Pick a trading style and stick with it until you have gained mastery. You will be limited in the number of trades and position sizes you execute, so be diligent about doing research and studying charts to find the most profitable setups.
Master risk management
When you have a small account, you can’t afford huge losses. By effectively managing your risk, you’ll stay in the game long enough to watch your account grow. Set price targets on trades; calculate risk-reward ratios; and follow a disciplined stop-loss strategy.
Adhere to the 1% rule which limits your overall risk on any trade to 1% of your account. As your account grows, scale your strategy by maintaining your risk-reward ratio while increasing the number of shares you purchase.
Follow risk management best practices to help navigate sticky emotions that lead to overtrading and get in the way of your profitability.
Set growth goals
Because your buying power will be significantly limited with a small account, your growth will happen slowly at first and increase speed as you earn more capital and take larger trades. Goal setting is critical to your trading strategy and can keep you motivated as you make gradual progress toward a larger account size.
Start by setting weekly, quarterly and yearly growth targets. Then, monitor your progress; celebrate wins; study losses; and make adjustments as needed to your trading strategy.
Scale incrementally
Now that you have a goal, take small steps to get there. Invest a small amount of trading capital into your account each month to grow your account over time. By depositing the amount of a
cup of coffee every day (about $3), you can increase your bank roll by more than $1,000 year-over-year.
Supplement your income
If your goal is to launch a full-time trading career with a small account, you’ll likely need to fund your trading with additional income. Do additional work to supplement your income and grow your account. Consider doing independent work for a ride-share or delivery service like
Postmates, DoorDash and IInstacart. Market your skills on freelancing platforms like UpWork,
Fiverr and Freelancer. Diversify your investments or start a business. For more ideas and tips to help you get started, check out our latest eBook All Traders Need Multiple Income Streams.
Paper trade
Paper trading is a great way to build confidence with a small account. Many brokers offer paper trading platforms with simulated buying power. Adjust your cash balance to reflect your actual account size and practice trading until you get comfortable with the mechanics of setting price targets and risk management. The benefit of trading with a paper account is that you can test your small account against various trading styles and markets without risking real money.
The Bottom Line
Becoming a successful trader with a small account may be difficult, but it’s not impossible. Get familiar with trading rules that limit traders with small accounts. Follow a disciplined trading strategy and practice risk management. Set growth goals and accelerate those targets by supplementing your trading capital with additional income. Most of all, don’t quit! Months from now when you look back on how much your account has grown, the journey will be worthwhile.
Get out there and crush it!
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