Beginner's Guide to Efficiently Managing Small or New Trading Accounts: Top Strategies for Success
By: Tanner Yarton
Hello Investors,
Managing a small account, especially with options can be difficult. While it may seem impossible, there are a number of ways to properly manage risk while giving yourself as many opportunities to grow and learn.
There is a common misconception that having a small trading account means going all-in with every position. This belief is incorrect and can lead to disastrous outcomes, as I experienced when I first started.
In this article, I'll share insights from my personal experience, including the mistakes I made and the advice I wish I had received when I started with $500 nearly 6 years ago.
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Personal Mistakes Early On
In regards to position sizing, these key mistakes took me out more often than anything:
Sizing based on the price of the options
Over sizing
Under sizing
To put it simply, when I had a $500 account and came across two options I liked, one costing $45 and the other $15, I made the mistake of buying one of each without considering their relative sizes. As a beginner, I lacked understanding of what would work and why. To correct my mistake, I should have bought three of the $15 contracts to make both positions the same size. This way, I would have been equally sized.
This is a nice transition into the next mistake, which is oversizing or under sizing. If my account was $500, sometimes I would be going all in, or not in enough, based off of “feel”. Let me be clear, I had absolutely no feel when I first started.
Instead, what I wish I was doing was position sizing equally at about 10-20% of the account into each play. This gives me $50-$100 per trade, or on average 7 trades for the full account. To succeed, you first have to last, and to last, you have to learn.
At the early stages of trading and charting, buying breakouts from popular patterns worked best for me. If I was watching a simple flag, I would cut if it went below, and sell at the high of the flag to exit. This strategy had about a 70% win rate, which wasn’t great, but allowed me to last and continue to learn without blowing myself up too quickly, despite my sizing issues. To see more on chart patterns, read my article HERE. To read more about how to read a chart, see HERE.
Strategies
After a few blown accounts, and hundreds of hours of studying and learning from my mistakes, things began to click. Below are a few keys that got me out of the funk, and into placing successful trades consistently:
Staying away from 0 day-until-expiration contracts
Taking base hits
Trading market money once viable
Not sizing up
Lots to unpack there- lets start from the top. 0DTE contracts are a must avoid for me on a small account. They expose you to rapidly depreciating leveraged assets, where even if the move you want happens, if it doesn’t happen fast enough you still lose. Buying as much time as you can while still maintaining your sizing rules is critical to maximize the value of your buys.
A “base hit” is exactly as it means in baseball. You got on base, it counts towards the stats and it advances the game in a positive direction. While not a homerun, stack up enough of these and you’ve made it around the diamond! Finding homeruns is great, and when you get them, be thankful, but to expect only monster moves all the time is something I quickly realized to be wildly unprofitable.
Even now, years later I still take my first scale target fairly close to entry to secure the “base hit”. building these habits early pays dividends in the long run, no pun intended.
If you have early success in the markets, removing your initial investment and only trading the markets money can drastically reduce the emotional burden that trading can bring. Additionally- If you are worried about the money you’re investing, you’re likely over invested.
Sizing up, while very tempting is not as great as it seems. Many believe that if they size up, they will be able to scale more contracts, but fail to remember that they don’t know how to scale in the first place. Unless you organically grow your trading account, sizing up has personally never given me a greater success rate.
My favorite Stocks to Trade on a Small Account
Lastly, and maybe most important is finding stocks and options to trade that have high daily ranges (volatile) while maintaining relatively cheap options. Below are a few stocks that I like for small accounts:
AAPL 0.00%↑- the most popular stock in the market, with contracts ranging from $50-150 only 2 strikes out from at the money.
AMD 0.00%↑- relatively volatile, has contracts under a dollar only a few strikes out
CRM 0.00%↑- Slightly less liquid, but still a popular stock with options under a dollar very close to in the money
TTD 0.00%↑ SHOP 0.00%↑ PYPL 0.00%↑ DDOG 0.00%↑ ROKU 0.00%↑ - All very similar in options price and how they move. This was a great group for me to teach with in 2020 when lots of new traders were coming into the market.
Again, these are just some of my personal favorites to trade on a small account. Making your own decisions is crucial to success.
Closing Notes
Trading small accounts is not easy, but it gives one the opportunity to learn to trade with a small capital risk. As I said before, in this position it is paramount to maximize the value of each trade, from a price, as well as a learning point of view. I failed early on, many times. Drawing out the failure as long as possible taught me more than anything. And remember, we learn more from our failures than our successes.
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Super well written! Thanks Tanner.
Great article, extremely useful as well!