What is a small trading account?
I like to define a small trading account as an account that is less than a thousand dollar. If you have to use a mini account for your risk management to fit with your lot size, then you have a small trading account. This type of accounts are usually worth less than a thousand dollar.
How can I increase my capital in a small trading account
Making it in anything in life requires orientation,strategy and consistency. Whether betting or trading or even in the works of life. you need a strategy. In the business of trading and mainly trading small account you need to have a winning strategy. The most important strategy you need to grow your trading account is your risk management strategy. Risk management is responsible for the steady growth of any account.
what is a risk management strategy?
These are sets of guidelines and rules that guide the way you handle risk when trading with your account. Below are some tips you need to know before adopting a risk management strategy.
1. Predetermining your risk
The success of any small account trader lies in the ability to predetermine your risk before executing a trade. You might ask “what is the ideal percentage to risk for trading per trade for a small account?”
According to Investopedia, a good trader should risk between the range of 1 and 5% of his trading accoun. This therefore means that once you lose more than 5% of your account, you should step out of the trade.
According to the book the new trading for a living, Alexander Elder goes on to say the ideal risk is 2%. Another source takes 1% as the ideal risk a good trader should take per trade
I feel a trader should not risk more than 2% of your account. This means that if your account is worth hundred dollar, your maximum risk per trade is meant to be less than or equal o two dollars nothing extra
I also look at an ideal risk as anything that is not capable of altering your trading psychology. You want to risk something that allows you breathe, something that allows you sleep without thinking of the charts.
2.Accept the risk and be disciplined with it
After predetermining the risk the next thing to do is to accept the predetermined percentage. Accepting the risk means setting your trade to exit when the trade hits your predetermined risk. When you accept your risk, it simply means that there is no room for increasing the risk. In other words, accepting the risk means placing stops at the predetermined risk level and leaving it to play out.
However, this is the main problem of most trader. Most times when a trade doesn’t go in your direction, amateur traders try to make the trade go their way by increasing their risk hoping it will go back in their direction. Sometimes it might go back but most times it gets to appoint where you can’t take any further loss. Then you exit the trade with about twenty percent loss.
I read an analogy somewhere, although I can’t remember where It says
If you lose 25% of your account on one trade, you need to make 33% on that trade to get your capital back. If you lose 50% of your capital on a trade, you need to make 100% in the next trade to make your capital back.
How exhausting can this be?So therefore if you are going to risk anything, you have to risk something that will give you a chance of holding your capital and earning more.
3. Risk reward ratio.
Predetermining and accepting your risk without knowing the concept of risk reward ratio is like learning medicine without saving lives. It's totally useless.The goal of every trader is to increase his account balance and this formed the basis of my argument with @the-polymath. In order to accumulate equity, your reward has to be higher than your risk. if you risk two percent for a particular trade, your aim should be to get atleast 1.5 times the risk you put on a trade as your reward. If you risk to reward ratio is 1:2, you don’t have to win all the trades to have your account on green with a good trading system. Even if you lose five trades out of ten trades, you would still be making 10% with a standard risk of 2% per trade.
Never widen your stops, widen your take profit.
These are some of the way to accumulate capital when trading be it a small or a big trading account. In my next post I will be talking about exiting strategy, importance of having a strategy and paper trading.
On a final note, no one knows where the price is going but with adequate risk management you can grow your account. Consistency and discipline will move your account to greater heights.