5 Reasons Trading a Small Account is Harder Than Trading a Large Account
Tips for trading stocks and options in a small account and overcoming obstacles.
This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.
Many say there is no way a small account can make the kind of profits the large trading accounts make without using margin and taking huge risks but I’m here to tell you and show you that this thinking is wrong.
Last week I made 32.7% profits in one day, trading 13 options contracts with a cash account, and only $1,000 total to work with. It took about two and a half hours of trading after about an hour of preparation.
Trading with a small account allows you to take smaller losses while learning but you sacrifice the flexibility that comes with having a large account. However, there are techniques you can use to maximize your effectiveness as a trader starting with only one or two thousand dollars in your account.
Most small account traders use a “cash account” which allows for multiple trades every day without worrying about the pattern day trading rules. This constraint coupled with having limited funds really does impact your ability to trade.
A cash account simply means you’ve given up the ability to trade on margin and can only trade the settled funds in your account every day. When those funds have been traded, you are done trading for the day (no matter how perfect the next set up is).
This is especially painful if you’re interested in trading options for a stock like TSLA or NVDA because the price of the options only allows a small account trader to buy 1 or 2 contracts each day. When you have only one trade to make, it becomes increasingly difficult to sell when you should be closing the position.
In a cash account, when you’re done trading the cash you are done trading for the day and it can play mind games with you when deciding on when to exit a trade. Nobody wants to end the day in the red. This is just one of the problems small accounts face.
Here is a run down of the obstacles small accounts run into and solutions to hopefully help you become a more consistent trader.
Small Account Obstacles & Simple Solutions
The biggest difference between trading with a limited amount of cash and trading with a large account is the amount of flexibility you have on a daily basis with your trading decisions.
In a large account you can take a small loss quickly and know you have plenty of trades yet to make that day to recoup any losses. Why hang on to a losing trade when you can exit, take the small loss, and wait for a better set up?
Small accounts are not afforded this luxury, so they are more likely to hang on, looking for the recovery while the price moves in the wrong direction.
The top reasons (in my opinion) small accounts are harder to trade:
Limited Number of Trades: this is due to trading rules (like PDT) and decreases your overall flexibility as a trader.
Wins Feel Like Losses: a tendency to stay in trades too long and miss taking targeted exits because profits do not feel large enough (even at +25% or +30%).
Limited Size of Each Trade: you only get to sell once, maybe twice which makes each sell decision more important and therefore more difficult.
Forced to Close Red: it is difficult to end the day early and losing. Without more cash to put to work, losing trades are held in hopes of recovering losses.
FOMO is Magnified: the fear of missing out is far more intense when you only have a limited number of trades to make and see big moves happening early.
I have found there are simple solutions to these problems faced by small accounts and the biggest impact that comes from these solutions is to your mentality while trading with limited funds.
The first thing to do is embrace these limitations and accept them for what they are. When you overcome the obstacles of trading with a small account, you will have the confidence and tools needed to absolutely crush it when you have built up enough funds for large account trading.
As I have shown above, it is possible to trade a small account successfully. It does require discipline and some knowledge of how to work around these constraints. Here’s each one broken down, complete with solutions for all five.
Limited Number of Trades, Minimum of Three
When trading a small cash account, it is imperative that you find stocks or options to trade that allow you to take no less than three trades (I prefer no less than 5 trades, more on that later). In other words, if you have $900 to work with you should only put $300 into your first trade.
The reasoning behind this is you want the flexibility to be able to do two things after this first trade: 1) close it to take the opposite trade (if the market signals to do so) and 2) maintain one additional trade to re-enter if the original plan comes back into play.
How many times have you exited a trade only to see it work out in your favor after you sold? You have put in the time to study the set up, and when it presents itself, you take the trade only to see it reverse so you cut it only to see it then follow through as originally expected. Keep cash available.
The perfect set up does not mean a trade will always go your way and having capital to put to work after closing it out allows you to cut the losing trade much more easily. You know you can re-enter later and with more conviction than before.
When you have a small account and the trade goes against you, it is incredibly difficult to cut the trade because the impact is felt more so than with a large account. You also do not want to be in the position of exiting the trade only to see it work out only a few moments later. It is so unenjoyable.
This is why I advocate having the third bullet to fire. Simply sizing your trades to ensure you can make three in total every day will give you a huge mental advantage because of the added flexibility to be nimble when markets do not move exactly as expected.
It is true that this approach at times will leave you with extra cash sitting around that could have been in your initial winning trade. If that happens, perhaps it is better to think of it a little differently. I focus on the one win already on the books with the ability to make more trades and add to profits.
When Wins Feel Like Losses
It is easy to fall into the trap of looking at your account balance while trading and targeting specific dollar amounts for the day. DO NOT DO THIS.
Small account traders get lured into trying to maximize their gains to the point of capturing every penny of upside possible. You do not need to make +50% every trade or double your account every day to end up with a large account in a relatively short amount of time.
Here is some math that I like to reference to remind me that $150 profits in a week for an account with $1,000 is actually MASSIVE and can lead to having a large account sooner rather than later.
Yes, I consider $8,800 “large account status” and the reason is due to the ability to make more than enough trades across a wide variety of stocks and be far nimbler with this account size. Trading strategies, as I seee it, do not really get any different as you move up from here. You’re just putting more money into your trades.
So, stop thinking that the small profits you are taking in are not large enough. Trade your plan, sell at your stop loss and sell at your profit targets. Do not worry about how much you’ve made or lost until you’ve completed your trades. (I will caveat this by saying you should be monitoring your account to ensure you are not over trading, taking on large losses, etc.)
Spend one year building your $1,000 account consistently. Then, when you have the capital, you can increase your trade sizing and your associated profits.
Limited Size of Each Trade, How to Scale
While you can make each trade size equal to roughly 1/3 of your account as previously mentioned, I prefer to stay much closer to 1/5 or 20% of my total account in any single trade. I also prefer each contract to be no more than half of that cost.
You will hear a lot of large account traders talk about no more than 5-10% of your account in each trade. I don’t disagree. But to make up for the lost flexibility, small accounts need to make adjustments and this is one I believe in.
I also believe you must find the right vehicle for small account trading. Meaning, finding a stock or options that are priced such that I can buy at least two at a time, preferably three, while making no less than 3-5 trades per day. This allows you to scale in and out.
Scaling in and out of trades simply means to buy in increments until you reach your full position and then follow the same idea while selling, taking profits by selling incrementally on the way up (or down if you are in puts). Scaling is powerful.
When you initially buy only one contract you give yourself some time to watch this small position size go to work with little risk. If there is a move in the wrong direction that stays within your parameters for taking the trade, you can add your second contract. This is scaling in.
Conversely, if the stock moves in the direction you expected you can either scale in on the move or wait for the inevitable pullback to jump in with your next buy. Your second buy is almost always at a higher price than the first in this situation.
If the stock really takes off and you do not get a chance for the second entry, you are making money and probably a decent amount. What I tend to get more excited about though is after this quick win you still have plenty of capital left to trade with because you only bought the single contract. You’re in the green, can trade more, and with added confidence!
The overall takeaway here is again along the lines of recovering flexibility lost by trading a small account. You may want to trade TSLA options contracts for $4.50 each but I would recommend finding options closer to $1.00 per contract until you have built a larger account. This allows you to scale in and out of multiple trades just like the large accounts do.
Forced to Take Losing Days More Often
One truth that is unavoidable but can be miminized is being forced to close the day with a loss. What I mean by this is tied to what has previously been discussed. There is no ability to recover losses when you are out of money to trade.
This leads to more losing days than if you were a solid trader and had some additional funds to recover early losses. Nobody makes only profitable trades. We all take losses. Small accounts feel them that much more.
To reduce the number of days where you end up with a loss and no additional trades available to you, ensure you size your trades and use stocks and contracts that afford scaling in and out. Those are your best bets, but there is one big rule you must follow if you want a chance at trading success.
No matter how quickly it happens or how frustrating it is, you must respect your loss targets and exit trades according to plan. The temptation to hang on for a recovery and ignore your stop loss is very real for small accounts and you cannot fall into this trap. It will destroy your account.
While there is no technique or strategy to directly address this obstacle, the simplicity of the solution understates its impact. Take your small “loss days” when they come. This will drastically reduce your “big loss” days.
Fear of Missing Out is Magnified
With a lack of flexibility that comes with limited funds you also may get the feeling that you need to get in on the “big trade.” If you see the “big trade” take place you get the urge to jump in for the ride to ensure you don’t miss it.
Even worse, if you feel like a big winner is setting up, the urge to pile in early is intensified. Getting in early can be twice as painful as the initial move is in the wrong direction so you exit only to watch the trade finally play out without you in it.
There is no easy way to address the fear of missing out on a trade which is why I saved it for last. There are thousands of trades to be made every day. This obstacle is truly on you.
I find it helpful to acknowledge that this FOMO exists, recognize there are thousands of trades possible every day, and remind myself that I plan to trade every day that I can. I will literally tell myself this out loud.
When I feel or see that I am missing out on a big trade my neighbors might hear me loudly exclaim, “There are more trades to come, don’t be a fool!” I do think it is helping my trading. Possibly not so helpful for the relationship with my neighbors.
Conclusion
Trading successfully with a small account is possible. I hope these examples and my thoughts around adding flexibility to trading with limited funds helps you with your trading success. If you have any questions or would like to know more, feel free to drop a comment, send an email, or DM me on Twitter.
I’m also building a Covered Call Strategy Portfolio specifically for small account trading. You can learn more about this strategy in last week’s edition of A Trader’s Education here. It is a great way to grow your account by selling options instead of buying them and I will continue to provide updates all year.
If you’re interested in tracking the progress of my portfolio you can sign up for free at Savvy Trader: Covered Call Strategy Portfolio by Trader Nate
Also be sure to follow me on Twitter @tradernatehere for daily posts on trade updates and trading strategies. DMs are open.
Have a great day and great week of trading ahead!