More from this Author
- February 21, 2013
- February 14, 2013
- November 16, 2012
- September 13, 2012
If you’re trading with $10,000 or less, you need to follow my 3 simple tricks to help you quickly and safely grow your profits.
It’s a fact: a majority of traders lose money. Many of these failures are new traders starting with $10,000 or less. They end up blowing up their accounts by chasing bad investments and using incorrect money management techniques. That’s why you need to understand a few basics before you get started.
But if you want to seriously invest the time and effort into actively growing your brokerage account, you will need several thousand dollars to begin. So, if you do not have $5,000-$10,000 saved right now, you need to get your finances in order before venturing into the trading world. Never risk money you will need to pay your bills or mortgage on a trade.
When you do have enough money set aside to fund a trading account, here are the three tricks you need to remember:
1. Don’t Overtrade
This first rule might seem too obvious. But hear me out…
Trading can be exciting — especially for a newcomer. There’s the thrill of your first big winner. Then there’s the panic of getting caught in a falling market. You might even experience the exhilaration of a losing position turning positive.
But if you are trading with a smaller account, you must keep a level head. Be selective! Only buy the very best setups. In short, do not overtrade.
Let’s say you make three round-trip trades per week. You trade through a discount broker, so each round trip costs you $20 ($10 to buy your shares and $10 to sell). That’s $60 per week, and $240 per month.
Now, let’s say you have a solid trading month. You put $2,000 toward every trade, and half of the trades move in your favor. You then sell these successful trades for an average gain of $100 each. Let’s also say that you’re able to sell your unsuccessful trades close to break-even. This gives you a total of $600 in gains for the month.
But wait… don’t forget to factor in commissions. That leaves you with just $360 — cutting your monthly profits almost in half.
And remember, this number assumes you did not experience any losses. That means you would have to immediately sell all trades that dropped below your entry price. I’m painting an ideal picture — yet commissions are still a huge problem…
With a smaller account, you have to cut back on trading every favorable setup that flashes across your screen. If you concentrate on making one trade per week, you can cut your costs dramatically. You won’t be chasing trades that only offer 1%-3% potential upside. And you won’t be spending more than $200 on commissions every month.
By making just one round-trip trade per week, your annual commissions would add up to $1,040. If you’re chasing three trades per week or more, your yearly commissions would be at least $3,120.
With a small account, it makes no sense to pay your broker more than $3,000 a year. I would bet that even the luckiest trader’s gains would not be able to overcome these fees…
2. Avoid Big Risks
New traders inevitably lay down a huge percentage of their account on a “sure-thing.”
But when it comes to the stock market, there are no “sure-things.” Even well-laid plans can fall apart. That’s why you need to respect the market at all times. Properly planning how much you are willing to risk on every trade is one of the most important tasks of the successful trader.
Let’s turn to market technician and Sleuth contributor Jonas Elmerraji to find out the proper way to manage risk:
“There isn’t a set rule for position sizes,” Jonas says. “The chance that you’ll blow up your account if you hit a “cold streak” decreases dramatically as your risk approaches 2% or less of your portfolio.
“Keep in mind that I’m talking about risk — or money on the line — not total position size. So for a $10,000 account, for example, a trade with a 5% stop loss level would justify a $4,000 position at a maximum. You shouldn’t stand to lose more than 2% of your total account value on any given trade.
“Higher risk trades mean that you should be taking smaller positions. On the flip side, incredibly low risk trades allow more experienced traders to use leverage safely.
“The best rule of thumb is to stay within your comfort zone. On that $10,000 account, if a $1,000 or $500 position size is the most you’re comfortable with, follow your gut and ramp up to 2% as you gain experience.
“Too often, new traders base the size of their positions on how much the stock costs (How much can I afford?). Instead, you should be basing your position size on where your stop loss is (How much can I afford to lose?) — that’s how you can allocate your portfolio like a professional.”
3. Think Growth
When you begin trading with a smaller account, you must have patience — but also a sense of urgency. We’ve already discussed overtrading. But now, you have to get on track by trading the right kinds of stocks — the stocks that fit your unique trading plan.
If you’re beginning to trade, you’ve already developed a familiarity with the stock market. You have an idea of the setups you like. You know what types of trades fit your personality. You might like trading moving average crossovers, but not chart patterns. That’s fine. You have the basic experience needed to find potentially winning trades and execute an order.
Once you have a plan, you must stick to it! I can’t emphasize this enough. Do not be sidetracked by a compelling stock story in the Financial Times or a tip from a friend or your broker.
Remember, we’re talking about the stock market — a place where it takes money to make money. Your mission has to be clear: making money consistently. When your account gets bigger, you can allocate more money to trades — and maybe even branch out to new investments. But with a small account, you have to keep your eye on the prize. Putting money toward an interesting story or a stock you think might be significantly undervalued will only lock up that cash for an unknown amount of time.
If you begin to set aside portions of your account for these extracurricular ideas, you’ll only be robbing yourself of money that would otherwise put to work on trading your original strategy. Make a plan. Then stick to it. Once your plan is in place, use my three tricks to take your trading to the next level.
– Greg GuenthnerSource: Penny Sleuth
Where Harvard, Yale and MIT Go for 10% Yields
When some of the brightest people on the planet need safe and sky-high dividend yields, they go to one man -- StreetAuthority co-founder Paul Tracy. Click here to read his latest report and to learn about 13 stocks yielding up to 10%.