Every trader who starts trading wants to trade big accounts but very few of us actually get to do this. Most traders are stuck with trading relatively small accounts not more than 5 lakhs and most of them go bust. Trading a small account requires very strict risk management and money management with strong mental strength because there is no buffer against mistakes or any unexpected losses. In Recent Memory 24 June was the day where many traders trading small account went bust. Nifty opened gap of 300 points and if you have small account if a trading account only covers its required margin for 1 lot of NF @50000, and it takes a 22000 loss, the account will become untradeable until additional money is deposited and most of traders will throw towel.
Trading a Small Account
Trading a small (or under capitalized) account is much more difficult than trading a large account. Large accounts are buffered against mistakes, unexpected losing streaks, and sometimes even bad traders, but small accounts have no such buffer.
In addition, trading a small account has psychological issues that make it even harder to trade the account well. For example, when a trader knows that they can only afford a single losing trade before their account becomes untradeable (because it will know longer cover its required margin), the pressure to make a profitable trade is enormous. If the trader handles this pressure well, this might not be a problem. However, even the best traders have losing trades, and there is nothing that can be done to avoid losing trades, so this is not something that the trader has any control over, which adds to the psychological stress.
Advice for Small Accounts
With all of the disadvantages, it appears as though it is not possible to trade a small account profitably. This is not the case, and small accounts are traded profitably by many traders (including professional traders).
- Trade with Less Leverage – Most of Brokers gives a leverage of 1:10 to 1:5, If you are new traders do not fall in trap of leverage. You Never drive a Luxury car with knowing how to drive a small car. Apply the same logic in market, do not trade on leverage if you do not know how to trade. Trade in cash market till you are comfortable with your trading strategy.
- Trade Conservatively – Traders with well funded accounts have the luxury of making trades with high risk (e.g. large stop losses relative to their targets). Trader with small accounts must be more cautious, and make sure that their risk to reward ratio, and their win to loss ratio are being calculated and used correctly.
- Adhere to the One Percent Risk Rule – Trading in accordance with the one percent risk rule provides a small account with the same buffer (against mistakes, unexpected losses, etc.) as a large account. Many professional traders abide by the one percent risk rule regardless of the size of their trading accounts, because it is a very effective risk management technique.
Some traders adamantly state that under capitalized trading accounts cannot be traded successfully. This is not true. Small trading accounts may be more difficult to trade successfully, but if they are traded correctly, there is no reason why small trading accounts cannot be profitable.
By controlling the stress that is often associated with under capitalization, focusing on risk management, and correctly applying their risk management techniques (especially the one percent risk rule), small account traders can make a good living from their trading, and may be able to turn their small account into a large account.