Trading with a small amount: How to trade online with a small account
Not every trader can fund their trading account with a large amount ($100k and above), most of the traders are stuck trading with relatively small accounts or those that only cover the required margin.
Trading with a small amount requires a trading strategy that helps reduce risks and enhance gains, so that the trader does not lose all his capital. For example, if a trading account only covers the required margin by $500, and incurs a loss of $600, the account will become untradable until additional funds are deposited.
Many beginners ask the question: how much initial capital should I start trading with? When it comes to opening their first live account funded with real money, a trader often wants to start trading with a small amount. In the following article, we will show you a complete guide on how to trade with small amounts.
What are the limitations of trading in a small account?
Trading with a small account is much more difficult than trading with a large account. Large accounts are insured against mistakes, unexpected consecutive losses, and even bad traders at times, but small accounts have no such temporary protection.
Even after being able to withstand losing streaks, trading a small account has psychological issues that make it difficult to trade well. For example, when a trader knows that he can only afford one losing trade before his account becomes untradable (because he will no longer cover the required margin), the psychological stress of having to make a profitable trade is enormous.
If a trader handles the pressure of trading a small account well, this may not be a problem. However, even the best traders have losing trades, so the trader must prepare for this psychological stress.
There are also differences in what a trader with a small account is allowed to do. Large accounts can be used to trade any available market, but small accounts may only be able to trade certain markets in certain ways.
Large accounts allow for more flexible trading – such as multiple lots and short positions – while smaller accounts may be limited to long positions that can be covered with cash. Decisions such as what positions you can take and how much leverage you can use are determined by the brokerages, but there are legal limits, such as a 2:1 limit on how much you can borrow to buy stocks. To be legally allowed to borrow money for trading, you must have a minimum of $2,000, and to day trade regularly in the US, you will need at least $25,000.
Small amount trading methods
Despite the restrictions that reduce the possibility of large profits by trading in a funded account with small capital. It is still possible to trade with small accounts and make profits, including professional traders.
Here are 3 things to keep in mind for those who trade with a small amount:
Trade using leverage
Leveraged trading allows small account traders to trade in markets that they cannot trade with cash. For example, when you day trade individual stocks, you can usually trade with up to four times the amount of cash you have in your account.
However, trading the same underlying shares using the option or warrant markets (both highly leveraged and high risk markets), only requires approximately 15% of the trade value in cash.
Leverage and margin requirements must be understood before trading. In this example, investors should not necessarily use leverage to increase trading volume – the number of shares – but instead just to reduce trading margin requirements.
Practice on the demo account
A demo account is a mock trading account for training offered by the trading platforms. These accounts are funded with fictitious money as well, which gives the novice trader the opportunity to apply what he learns and also to practice using the trading platform, and to start facing the market away from any risk before he decides to create a real account funded with real money. The demo account also enables professional traders to try out a new trading broker platform and explore its advantages and disadvantages, to make the decision to open a real account or not.
Place an appropriate stop loss order
All traders need to place proper stop-loss orders in their trades. It is not easy to determine the appropriate stop loss order, it requires sufficient knowledge and experience. You should also learn the process and mechanism of stop loss orders in trades. New traders often don’t have enough knowledge about stop loss so they set it randomly in the trades and that’s why they lose. Before setting a stop loss order, try to learn it accurately to achieve the desired results.
Follow the 1% risk rule.
Trading with the 1% risk rule provides a small account with the same temporary protection (against errors and unexpected losses) as a large account. Many professional traders adhere to the 1% risk rule regardless of the size of their trading accounts, as it is a very effective risk management technique.
Traders with well-funded accounts have the luxury of taking higher risk trades – such as those with large stop losses relative to their targets. A trader with small accounts should be more careful, and make sure that risk-reward ratios and profit-to-loss ratios are calculated and used correctly.
Some traders believe that trading accounts with low capital cannot trade successfully. This is not true, as it can be difficult to trade with a small amount and achieve good results, but if trading is done correctly, there is no reason why small trading accounts cannot be profitable.
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