Every trader around the world would love to have millions upon millions of pounds to trade with, however most won’t have anywhere near that amount. Most will have account funds that are small, but that doesn’t mean you can’t be any less effective in the market. Having a small amount of funds to deal with requires far more focus than one of large funds and risk management needs to be implemented in a stricter way. There is less room for mistakes and even lesser room for losses, should you be a day trader this guide will help you figure out how to day trade with a small account.
Level of Difficulty
There is no other way to paint it, should you day trade with a small account it will always be more difficult than trading with a large account. The reason for this is because where large accounts can be buffered against small mistakes, which protects a trader against an unexpected downturn; small account traders won’t have this luxury. Psychologically those trading with small accounts can be up against it, as with such fine margins to work within being able to relax while working the markets is far more difficult. However, as the following will detail, a few tweaks can allow a small account holder to get into a flow that will allow them to day trade with a small account successfully.
Trade with Leverage
When trading out of a small account, it is important to get ahead anyway you can. Trading using leverage is a way for small account traders to utilise markets, which they usually couldn’t trade using cash. Trading individual stocks requires a cash amount that is approximately 25% of the stock’s value, but trading the same underlying stock using the options market will only require around 15%. However, it should be noted that this method should only be used to lower the trade’s margin requirements and not to up the trade’s overall size. Leverage can be a key tool should you day trade with a small account on a regular basis.
Adopt the 1% Risk Rule
As a small account trader you will never be able to obtain the same degree of buffer of someone who has millions backing them. However, this doesn’t mean you can’t get close by adopting the often-favored 1% risk rule. It can increase the buffer of a small account trader and is considered an effective risk management technique. To abide by the rule you need to make sure that no more than 1% of your account is at risk on a single trade, meaning that you would operate on a small profit, small loss setup. Should you day trade with a small account; the 1% risk rule is something that can help you start an effective trading rhythm.
Stick with It
Many market experts will tell you that you can’t be effective should you day trade with a small account. However, the cold hard facts prove that such sentiment couldn’t be further from the truth. If you keep on your toes, make tweaks where necessary and trade appropriately, then there isn’t any reason as to why day trading with a small account can’t reap rewards.