Sponsored Content - Trading small accounts can be profitable! Simpler Trading’s Allison Ostrander discusses three options strategies ideal for smaller account trading.
There are lots of reasons you might be trading a small account. Maybe you don’t have a lot of capital to work with or just want a secondary source of income. Or perhaps you’re building investments for your children.
Whatever your reasons, knowing small-account trading strategies can be a big benefit for generating wealth.
Trading a small account can be really rewarding, even though working with less capital can sometimes be a little more challenging. Many traders have done it and you can do it, too. Here are a few things you want to keep in mind when trading, and a few strategies for small accounts that I’ve personally found useful.
Risk Tolerance Trading a Small Account
The first thing to ask yourself when trading any account is, “What’s my risk tolerance?” Determining your risk tolerance is basically determining how much of your account you’re willing to lose. Being clear on boundaries for risk helps to keep emotion out of your trading. Emotional trading can be costly, especially when you’re trading a small account. At Simpler Trading, we always recommend incorporating your risk tolerance into your trading plan.
Now, risk tolerance can be looked at in two different ways: risk for individual trades and risk for your overall account. Traders who take my class or have traded with me know I have a 25% rule, meaning I don’t trade more than 25% of my account in new trades.
Let me explain. I don’t put all 25% of my account into one new trade. I split that 25% into multiple trades. For the rest of my account:
- I leave 25% for the management of a new trade that may fall behind.
- Then I leave the other 50% completely untouched. That way, if I lose all my new trades, or I just had a bad month, I still have 50% of my account left over to strategize and recover.
Trading is a matter of endurance, and you need some funds on reserve in case things go wrong. Remember, even the best traders lose. This is especially important if trading is your full-time job. No matter what goes wrong you still want to have enough capital to pay yourself.
Now, of course, this approach differs from person to person. You might feel comfortable risking more than 25% of your capital…or your comfort level may be less. It’s up to you to decide what you can tolerate. That will be the basis for how you trade from then on.
Options: A Great Way to Start Trading a Small Account
Once you understand your risk tolerance, you can then determine how you want to trade. Options are a great small-account trading strategy because the barrier to entry, as well as the risk, are lower. Let’s go over a few of my favorite ways to trade options with small accounts.
Long Calls and Long Puts
Long calls and puts can really help to grow a small account. As a reminder, long calls let you buy at a preset price in the future; long puts let you sell at a preset price. Long positions are great because if your predictions are off, the option expires and your losses are more manageable.
Just note, when trading a small account, you may need to find symbols with a smaller underlying asset price to stay within your risk tolerance.
I’ll give you an example. Sometimes assets have long calls that are out 30 days. These can cost anywhere from $2 to $5 per contract. If you have a $1,000 account, and you’re only risking half of it, then a long call worth around $2 would stay within your risk tolerance on one contract—in fact it would only be a $200 contract. Then you would still have capital left to consider another trade in another sector. Or you can trade another symbol with a different setup on a different chart.
Long calls and puts allow for a solid profit potential, but can also become expensive, especially if we’re talking about larger symbols like Amazon (AMZN) or Netflix (NFLX). You might be inclined to trade smaller symbols, but that can also mean there is less volume and, as a result, less interest. So keep in mind that you’re going to need to get closer to the bid, or ask.
Best case? You get a spike to the upside on the trade, which gives you a pretty nice profit on a rather small risk!
When long calls and puts cost too much to trade, vertical spreads can come in handy. As you may know, vertical spreads are when you buy (or sell) the same option type with the same expiration, but using different strike prices (which is what makes it “vertical”). Whether a debit or credit spread, this can still be a great way to take directional moves without risking as much capital.
For example, you might have a long call that’s $30. With a $1,000 account, it would make no sense to jump into that trade. However, a 10-point long debit vertical spread is only $3.50 per contract. So instead of paying around $3,000 cost basis you’re only paying $350 cost basis for each contract you get into. It greatly reduces risk while still letting you make a directional move to the upside.
While the amount of profit you can make is limited by the spread since it is vertical, this trading strategy still allows you to take advantage of a trade that may otherwise be out of reach.
Iron Condors and Butterflies
To build off of vertical spreads, iron condors and butterflies can also be effective strategies to trade small accounts—they typically can allow for a lower-risk, higher-reward trade. They are a little more involved because your position is actually a balance between four contracts: long call, long put, short call, and short put. These can be great ways to consolidate your charts, and are really worth investigating as part of your small-account trading strategies. Iron condors, for example, are helpful in choppy markets or for trades where you have a target in mind with an underlying asset price.
Remember, Charting Matters—for All Account Sizes!
Overall, no matter what strategy you use for trading your small account, your chart setup is really important. The chart always comes first before throwing out a trade. If you don’t focus on the right charting, you’ll be going in blind—even if it works you won’t know any technicals or have any valuable information as to why it worked. The only way to create an effective trading strategy long term is to learn from each trade and create improvements each time.
Working with a trading mentor and learning how they chart (and execute) their setups can be really helpful. That’s what I love about Simpler Trading…I really believe that live trading rooms and hands-on trading education make people better traders.
If you’re interested in learning more about our courses and mentoring, you can find us at SimplerTrading.com.