You may be just starting out, or you may have had a few bad experiences and are trying to work your way back up. Either way, it can feel like there aren’t many opportunities for investing without some degree of risk. Don’t feel discouraged! Even the biggest traders struggled with small starting stakes when they began their journey into finance and investment. However, that doesn't mean that small traders can’t produce big returns on capital. In fact, savvy traders have found ways to leverage small initial investments into much larger gains over time. To a new or even experienced trader, there is plenty to learn about finding success in the method. Here are some key strategies for trading small to produce big returns in any market.
What Are the Benefits of Trading Small?
Trading small provides an excellent way for beginners to learn the market and test out strategies without having to take a large financial hit if their attempts do not work out. The only way to become an expert trader is through hands-on experience. Small trades allow for this while also offering higher leverage. Other benefits of trading with a small account include better control and organization. A small account gives you the power to moderately control your limits, risks, and leverage. Using smaller numbers also lets you better organize a trading plan and the resulting data from the trade.
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The Limitations of a Small Account
With a small account, it will take some time before you can see significant rewards. Most new traders are not patient enough to stick with it and end up making crucial mistakes to eke out some additional profits. Do not use a small account with the expectation of gaining high rewards with little risk. Instead, see it as a training ground to learn the trend you’re following and strategies to capitalize on it.
Unlike with large accounts, you will encounter several restrictions on what can be traded with a small account and how. Legal limits also apply to how much you can borrow for stocks. These factors make trading small a waste of time for certain trends and strategies.
Understanding Risk and Reward
Some of the most important things a new trader needs to understand are risk, reward, and the relationship between them.
Risk: A risk is how much you could potentially lose if an investment fails.
Reward: The reward is how much you could gain if your trade is successful.
Ratio: Ideally, you want a risk-to-reward ratio less than 1.0, which indicates potential gains are greater than potential losses. This number is calculated by dividing the risk by the reward. An R/R ratio is a useful tool for estimating profits, but it is not a guarantee.
Find Quality Small-Cap Stocks
While most people look toward larger trades, there are plenty of small-cap stocks for you to take advantage of. How do you find the best one?
When you find a small-cap stock, examine what the minimum entry amount is and determine how much you’re willing to trade above that. You should also consider how much competition you want. Less popular stocks will yield greater rewards per individual but also increases risk. However, more competition means smaller profits and less opportunity to test the full effectiveness of a strategy.
3 Strategies for Trading Small
The success of a trade almost always comes down to the strategy involved. Here are three main strategies for small trading that even beginners can use.
- Day Trading: The day trading method involves buying and selling a large quantity of an asset within a single day. This strategy is used when a trader sees high prices today but suspects they will drop tomorrow.
- Scalping: Scalping trading is a subcategory of day trading strategies. Whereas day trading allows assets to be bought and sold at any point in the day, scalping completes the process within a few minutes. This rapid buying and reselling is ideal for small amounts that can gradually add up.
- Positional Trading Strategy: This strategy is for traders who want a long-term investment with a higher payoff. The trader holds a single position for any timeframe longer than a day. Under this strategy, the potential gains rise. However, potential risks rise alongside them.
Tips for Trading Small Accounts
Trading a small account can sometimes be more complicated than trading large accounts. Here are some tips to keep you on track.
- Cut losses immediately
- Be patient
- Exercise self-restraint
- Stick to less than 2% risk
- Test and retest a strategy multiple times before concluding if it works or not
- Set a stop-loss amount
Bottom Line
Trading small accounts can be difficult, but the process can yield profits with enough patience and a proper strategy. Use the information in this guide to begin small trading today!
