Trading a Small Account

There are 3 key components to trading:

 

1. Price Forecasting
2. Trading Approach
3. Money & Risk Management

The first component, price forecasting, is probably the most important of all key components. The reason is that if you are not correct in determining price direction, the other two components cannot help you.

Price forecasting is a process that determines whether the trader is going to take a bullish or bearish stance. The trader must determine this first so as to know whether to enter the market long or short.

Once the trader has determined the direction in which to trade, next comes the approach or method for doing so. The method used by the trader to enter a trade must be properly suited for the type of trader and his/her account size. For traders with small accounts, the trading approach/method should help the trader determine price entry points that will not expose the trader to large initial risk. Obviously, the closer the trader can enter from a new market top or bottom is the lowest initial risk price point possible. If the timing approach/method leads or lags greatly from a new market top or bottom, the amount at risk may be too great for small accounts resulting in few trades to account wipeout.

Determining how many contracts can be traded is determined by the account size and the initial risk of the trade in question. This is where Money Management comes into play. A good Money Management plan will allow for the most number of trades with the least amount of risk exposure based on account size and per trade risk that is feasibly possible. It must account for the possibility of several losses in succession and yet allow for the trader to possibly recover. Risk Management comes into play once the trade has been initiated. Proper risk management is requires learning how to adjust the trade stop orders as the trade progresses, allowing for profit capture as soon as possible while also allowing enough room for the market to operate. The objective of a good risk management plan is to get the trade to breakeven as quickly as possible so as to be in a ‘free trade’ situation. From there, the risk stop order is adjusted deeper into profit territory as price moves deeper into profit. At some point the risk stop will exit the trade, hopefully while in profit.

Traders with small accounts especially need to get their trades to the ‘free trade’ point as quickly as possible to prevent as many small loss situations from their record. This may in turn cause some potentially good trades into a wash due to a quick exit caused by a tight stop-loss. The small account traders need to be okay with this as it is a matter of averages. If the small account trader, using a good timing approach/method, enters 5 trades where the initial risk is low and only one of these trades turns out a big profit, it is well worth the effort.

For example:
Trade 1 – Breakeven
Trade 2 – Small loss
Trade 3 – Breakeven
Trade 4 – Breakeven
Trade 5 – Big Profit!

The small account trader must learn to live with the averages if to eventually become a large account trader. Take only trades where the initial risk is low as determined by a good timing approach/method, and then using good risk management by aggressively tightening the stop-loss to breakeven at the earliest possible moment, normally once the trade moves into profit territory. Many times such an aggressive stop-loss adjustment will stop a trade early. But at least it will be at breakeven. However, a good moving market will not look back and thus allow for the stop-loss to be adjusted less aggressively following the breakeven point. Once a stop-loss at breakeven point has been reached, the trader can usually give the market more room to move deeper still into profit since the trade is virtually without risk of loss.

Obviously then, traders with small accounts need to become well informed on Price Forecasting before anything else. From there, the trader will need to have the right timing approach/method to allow for many low initial risk trades. All this is necessary before you even have to worry about risk management, which is definitely as important as any other component when it comes to successful trading.

Note: About the Author
Rick J. Ratchford is President of ProfitMax Trading Inc. He is a full-time commodity trader for his own account as well as assisting other traders. He has been a computer programmer for more than 20 years and a trader since 1990.