Tips to grow a small account
- Wait for the right moment to take a trade : You will see me taking a lot of trades. New members with small accounts sometimes get confused about which trade to take on their account. The short answer is that “all trades are created equal”. There is no single trade that is better than the other. The only tip I can give you is that it is better to add trades on market pullbacks (or red days). That gives you the best bang for your buck. Also, when you see me putting on trades, don’t jump at them. Watch the charts, see if the trade makes sense to you. With mean-reversion trading, you will notice that if you are patient, you may get many opportunities to enter the same trade at lower strikes than mine in the following days.
- Give it time : Small accounts are the hardest to grow as a series of “bad luck” trades can really destroy them. My own 25k challenge account is flat since Feb 22. But my 250k challenge is growing very nicely. Think about it – If you start with $2500 and you happened to join during a correction or a deep pullback and your first 3 trades go bad (you can take only 3 trades when you start with $2500), does that mean these methods don’t work? For any statistical system to work, you need a large number of occurrences.
- Remember Probability and Statistics from school? When you are dealing with statistics and probabilities, the larger the data set, the less divergences you will have from the mean. So with large accounts, the sheer number of trades (large dataset), evens out the outliers. But a small account may have completely skewed results because of the small sample size you are using. So, if you get 3 winners in the first 3 trades, you will think the system has 100% success rate. Similarly, 3 losers may cause you to think that nothing works!
Think of it this way – if I tell you to find out the average height of an American male, and you measure the first 3 males you find on the streets and they are all 5 feet tall, what was wrong with your method of measurement? HINT: Small sample sizes don’t work with statistics! The bottom line is that patience, observation, learning, improving yourself is what pays in the end. There is no “Holy Grail” trading strategy out there which you can buy with money which will quadruple your account in 2-3 months. “Time” and “Patience” are one of the most under-rated words in the trading world full of GME, AMC and BITCOINS!
- This trader did great! They just don’t realize it yet: Starting around August 2020 would mean this trader experienced horrible market conditions. Almost 3 corrections since they joined, so he did get the bad luck of the draw, but if he didn’t blow out his small account even after that, that was a tremendous learning experience that he went through without even realizing the beauty of it.
- Don’t play too safe! During market pullbacks, I expand my portfolio allocation between 40%-50%. Did you do that? If you were gun shy during pullbacks, that will end up hurting you. Playing “too safe” is as bad as taking too much risk. Find your sweet spot! It will be somewhere in the middle.
- Drop your allocations during green markets: During green markets, did you drop your allocations down? Remember 30% is not a target but a max limit. When markets are green (like April 2021), don’t force yourself to trade. Instead focus on closing winners and dropping allocations.
- Spread the love: Did you wait for a new week to add new trades? Filling up all your future expirations with trades from a single week of trade alerts will eventually end up destroying you.
- Spread the love (I mean really spread it out): Even within a week, did you spread out your trades across days? This is especially important when we are in a pullback. If you can only take 3 trades a week, then take them between Wed and Friday. You will notice that after I send a trade alert, the stock in question will keep falling for days. If you wait patiently you will get into lower strikes and have a better probability of success. And finally, I mention the sector in my trade alerts. Use that to make sure you are not too heavy on any given sector.
- Don’t jump at trade alerts: Did you immediately take a trade after seeing a trade alert or did you take your time to process it, watch the charts yourself, see your risk distribution across sectors etc, before deciding to take the trade? FOMO doesn’t help anybody. Patience is what will pay in the end.
- 50% Loss Rule is your friend – The toughest part with trading is admitting that you can have losers. Fight the tendency to hold on to losers all the way to the end. Creating “positive expectancy” in your portfolio should be your main focus. So, do whatever it takes so that you have winners > losers in each expiration. Closing losers by following 50% loss rule will ideally mean 1 winner cancels 2 losers and you will be in a sweet spot even on weeks where markets are not co-operating with you. I realize that this is not always possible and you will have weeks where losers > winners. But even if you have a week where you have 2 winners and 4 losers, you could close the week out flat by closing losers at 50% loss.
- Use the cash! We keep 70% cash in our portfolios at all times for a good reason. When you experience massive corrections, you need to deploy the extra cash (Bailout Trades) to save your losers as corrections will turn multiple weeks worth of trades into losers. If you are gun shy and don’t deploy your cash during these times, you are doing yourself a dis-service.
- Don’t be hard on yourself! Finally, if you are starting out and you didn’t blowout your portfolio despite 3 corrections, kudos to you! You don’t realize it yet but you should be complimenting yourself at this point.