How to Manage Risk While Trading a Small Account Effectively

Trading a small account vs. a larger account requires you to make some adjustments. Especially when managing risk. Risk management is the most important aspect of survival and success as a trader. You must manage risk trading a small account as your funds are limited. Your opportunity to make mistakes is much smaller then someone with a large account.

These adjustments are key for the longevity of your career, and stable growth of your account. Not only do you have to make changes to your sizing and risk management, but you also will have to make subtle changes to your strategy.

If you are under PDT (less than 25k in your account balance), your goal should be to take every day one by one. Slowly but surely you should be aiming to grow your account, not all in one jump. There is no need to grow your account in 1 big swoop. We have to manage risk trading a small account first amongst all things. Sometimes having a cash account only can help you with this as you dont go wild. Here is the differences between Margin VS Cash account.

Today, we wanted to break down our top tips for managing risk while trading a small account.

Don’t Overextend Yourself

Don’t try to bite off more than you can chew. And by that, I mean don’t try to scale your account too quickly by taking on massive size. This is a marathon, not a sprint. Start small, get your feet under you, learn your strategy inside and out, and grow the account day by day. Growing a small trading account allows you to grow your trading skillset and get experience without risking a ton of money.

Live & Die By 1:2 Risk-To-Reward

Your risk-reward profile on a small account is your life-blood. You will live and die by it. If you aren’t building the habit from the start of your career while you’re trading on a small account, you will never trade a larger account properly.

So, as a set rule, every trade should have the potential to make 2x more than what you risk. That will always keep you on the right side of the growth of your equity curve. Look how easy it is to be profitable if you can live by that:

Trade LESS

Less is more in trading. With a small account, you have to be selective with the setups you take. You have limited ammunition to deploy into the market and a limited amount of money you can risk, so taking A+ setups is the key. Make sure it is a high-probably setup that you have tested or traded before, and fits your risk-reward criteria to a T.

Trade Stable Stocks

Your small account is your precious resource. Protecting it at all costs is crucial. So, if you are trying to protect your capital wisely, do you really want to risk your money on crazy stocks with micro floats that could trap you at any moment? Look to trade slightly higher float stocks with smaller ATRs at first, gain the confidence you need, and slowly progress into more volatile stocks as your account grows. This is huge when your thinking about how to manage risk trading a small account. Everyone wants the new hot stock. But often its the older slower stocks that trade easier and can be more steady.

If you want to check out some more tips and guidelines on managing risk, click below to watch our YouTube video that expands on these topics and more!

Master 1 Set Up

The more types of setups you take when you have a small account, the more likely you are to lose. You only need to master 1 strategy to grow a small account, and keep your risk under control. This will also make sure you are trading less, and help you avoid the overtrading trap. This is especially important if you are trading an under PDT account in the US.