You probably feel like a tiny fish in the ocean when you trade with a small trading account. Because the profit you make seems so small that you wonder if it's worth your time and effort. In today's article, you will find 5 practical trading tips that will help you grow your small trading account into a tangible amount. Intrigued?
How to use the 8 wonder of the world?
As you know, compound interest is the 8th wonder of the world. Here's how it works. Let's say you have a $1,000 trading account and you earn an average of 20% per year. After 30 years, your trading account will turn into $237,376.
But what if you add an extra $1,000 to your trading account every year, what would be the difference? So let's count. Let's say you have a $1,000 account, earn an average of 20% per year, and add another $1,000 to your account every year. After 30 years, your deposit will be $1,655,634.
See how powerful it is? Compound interest works great. But if you want to use steroids, you have to fund your trading account regularly - that's how big money is made!
Why looking at profit keeps you on the losing end?
Most of us trade because we want to make money. However, when you have a small trading account, focusing too much on profit only worsens your trading performance.
Let's say you have a trading account with $500 and you make a profit of $20. Then you think to yourself:
I spent so much time trading and only earn a measly $20? I need to make more money to justify the effort I put into trading.
Thus, you ignore risk management and enter into larger transactions. You may be lucky and double your deposit. But in the end, your luck will run out sooner or later and you will lose your entire trading account.
So the lesson is:
Don't focus on the amount of profit, because with a small trading account your profit and loss will also be smaller. Instead, look at it in terms of the R multiplier. This refers to your profit/loss relative to the risk you take on a trade.
For example:
- If you risk $10 on a trade and earn $50, that's +5R (50/10).
- If you risk $1,000 on a trade and earn $500, that's +0.5R (500/1000).
- If you risk $200 on a trade and lose $300, that's -1.5R (300/200).
Thus, by focusing on the R multiplier, you will get an objective view of your trading performance - and will not fluctuate, but will receive small but stable profits.
The secret of trading on a 7-digit trading account
Let me share one story with you.
A friend of mine has been lifting weights since he was 20. And when you're young, all you care about is lifting weights regardless of your shape. In the end, he paid his price, and weightlifting led to a back injury.
Then he realized that if he wanted to continue playing sports, he needed to learn how to work with weights again. And he had a coach who helped with this.
And do you know what they did first? They dropped all the weight and just focused on the empty bar. The moral of the story is that whether you're squatting with an empty barbell or a 100kg barbell, the process for doing a proper squat is the same.
Why am I sharing this story with you? Because the same is true for trading. Whether you are trading a $500 account or a $1 million account, the process is the same. The only difference is the number of zeros in your trading account.
Find the right broker
Whether you trade a $100 account or a $1 million account, one thing remains the same: your risk management. This means that your risk per trade should not exceed 1% of your account.
For example:
- On a $100 account, your trade loss must not exceed $1.
- On a $10,000 account, your trade loss must not exceed $100.
- On a $1 million account, your trade loss must not exceed $10,000.
Now, if you have a $10,000 account, then most brokers can meet your risk management needs. But if you have $100 in your account, you have limits because your loss cannot exceed $1.
Let's say you are trading 1 micro lot with a 50 pip stop loss. If you count, a potential loss of 5% on your account is not good.
Solution? You must find a broker that will allow you to trade nano lots (which are even smaller than micro lots). These brokers are market makers and they will allow you to practice risk management even on a small trading account.
How not to pay too much for your mistakes?
When you trade with a larger account, your "tuition fee" in the markets will be more expensive.
For example:
If you risk 1% on a $1 million account, then your potential loss on the trade is $10,000. So if you make a mistake, it will cost you $10,000.
On the other side:
If you risk 1% on a $1,000 account, then your potential loss is $10, which is way below the "tuition fee".
So don't be discouraged if you have a small trading account because this is a great time to learn from your mistakes while they are still "cheap".
How can you learn from your mistakes and even benefit from them?
- Record at least 100 trades (whether breakout, pullback, etc.)
- Identify the setups that make you money and focus on trading only those setups.
- Identify trade setups that cause you to take losses and avoid those setups.
And the best part:
It doesn't take you much money to learn which ways you can make money trading and which should be avoided at all costs.
Summing up
- If you want to increase your account to 6 or 7 figures, you must replenish it regularly, not increase your risks.
- Don't focus on your profits because that will make you depressed. Instead, focus on increasing the R multiplier.
- The process of trading on a small account is similar to a large account. So focus on the process, not the money (which will come later).
- Your trading mistakes will be "cheaper" on a small account. So learn and take advantage of it.
- You must find the right broker that will allow you to practice risk management even on a small deposit.