Big Trading Risk On Small Accounts – Bad Idea
April 29, 2009
If you’ve been reading my postings here for any length of time you’ll know that one of the things I am in favor of is new traders getting their feet wet in live, real-money trading as soon as they understand the mechanics of doing so. There are many benefits to be had in doing so which I’ve discussed before. That said, however, I think going live at that point should be done with as little money as possible to avoid taking a big hit when the inevitable losses and/or errors happen.
Having said that, though, I want to address something in regards to small account trading.
There is a tendency when trading a small account to take larger risks relative to the size of the account than would be the case with a larger one. This comes from two main thought processes.
1) I don’t feel like my trading is having any impact
Basically, this thought process sees the small nominal profits and losses from trading a small account and questions whether they are worth the hassle. If you’re trading $100 and making or losing $1-$2 per trade it can be hard to get excited. This nominal performance mindset which is fixated on the dollar amount (or yen, pound, euro, etc.) is the source of many traders ending up taking larger risks than are wise.
A way to avoid this mental pitfall is to focus not on the nominal amounts, but on the relative amounts. Instead of seeing it as making $1-$2 per trade, think instead of 1%-2%. That might not seem like a big deal, but taking a relative performance view like that is something that can also help later on when you’re trading larger to keep things in perspective.
2) It’s such a small amount it doesn’t really matter if I lose a big chunk
This sort of thought process tends to take the trader down a gambling path. If you don’t care whether you lose money or not then really your just betting. That is almost guaranteed to make you take bigger risks than you would otherwise take. It’s an incidious mental path which is expecially likely to hit folks who have a comfortable income or asset base such that there is no pain from the trading losses.
If you find your thoughts wandering down the “I don’t care if I lose it” path, check yourself. Remember that you’re trading small to learn and develop your skills at the least possible cost. It’s about developing good habits at this stage. As such you need to make sure you’re taking the kind of relative risk (see above) that you would take with a normal sized account (whatever that would mean in your case). Avoid the compulsion to trade large because you can always replenish the account. It’s not about making big profits at this point. There’s plenty of time for that. It’s about becoming a good trader.
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