I want to spend some time on the realities of small trading accounts today. I am no stranger to this and even know run a small portion of the money I hope to run some day. I am an expert at small accounts. It’s where I cut my teeth.
WHAT DEFINES A SMALL ACCOUNT
It’s really simple. Any account, that if it produced 5% a month would not cover your living expenses. That’s my definition.
Here’s the math:
Monthly expenses= $4000
5% of X = $4000
If you need $4000 a month and you can make 5%, if you have anything under 80k you have an account that you should not expect to pay your bills from and is “small”. There could be 100 different definitions but this is what I use.
So do I have a small account? Yep. I have to make multiple % a month to come out with what I need. So day I will be able to make 5% a month on an account and live the way I want to. But not yet.
SO WHAT IS A SMALL ACCOUNT USEFUL FOR?
The best thing to do is keep things in perspective and manage the expectations. Never mind the best, it’s the only way you will have a chance. There is a very specific purpose for a small account and it has very little to do with making money. Nothing actually.
It has everything to do with mastery, practice and skill development.
You need to learn how to manage you emotions in a trade worth $5 or $25 not $500 or $1000. If you try to work on your skill at this kind of risk you will never make it. I promise. You need to learn how to calculate pips, pip value, and contract size on a an account that mistakes cost a few bucks and not a car payment. You need to figure out how you trade best. You need practice at your craft. I firmly believe this can’t be done on a demo account with 50k. It won’t work. The return is off. What happens when you do some good things on that demo and then go back to your 5k. You won’t feel like you are making anything and you will over trade. Guaranteed. We have to feel like what we are doing is meaningful. We have to feel productive. If we make $5 a week, what the hell does that get you?? So it will feel horrible. But if you change the focus and absolutely forget the money and count the positive aspects of mastery and skill you developed that week and count the pips you were able to accumulate and then realize that pips are infinitely leveraged, you will feel like you are on the road to accomplishment.
There is an old Mel Gibson movie called “The Patriot”. There is a scene where his young boys have to help him in a battle and he asks them what he taught them about shooting. They answer “aim small miss small”.
That’s the simple truth of a small real account. Aim small miss small. Because while you learn to do that, you don’t want a small miss to cost 10%. It won’t teach you the importance of how to manage the money in the account. You will focus on the 10% loss, not the lesson. The lesson has the REAL VALUE. Because like the pip, the lesson is infinitely leveraged
“AIM SMALL MISS SMALL”
THE MENTAL TRAP
Simply put the small account is a mental trap. There are two distinct focuses in trading: Skill development and money accumulation. They are very different and should not be attempted together. While you were in college, did you think you should get paid for taking your courses? Was money accumulation your goal while you were sitting in psych 104? No. But you knew that eventually that class would be a portion of what added up to a degree so that you could have a skill that would allow for money accumulation.
THEN WHY ARE WE TRYING TO GET RICH FROM TRADING WHILE WE ARE SITTING IN PRICE ACTION 104?
Define your goals. Do you want to learn a craft? Or are you looking to the money too early? If you can stop focusing on easy cash and focus on development of a craft that probably won’t pay you any time soon, much the same as getting educated in any other field in the world, then you will have a small piece of the foundation for finding success.
You must do this. You must stop trying to squeeze your millions out of your small account and understand that money will take care of itself once you spend the time, effort, and yes tuition to the school of learning how markets function. It’s not free. It will cost you.
Be very deliberate this weekend in defining your goal. If it’s cash with no skill, you will find this very frustrating. If it’s a skill that will eventually provide more cash than you can imaging but you have to put in your time and investment, then you have a chance.
Have a great weekend everyone.