When most people start getting into day trading, they do so with small accounts. As they build their skills and bankroll, they then expand over time. Starting with a small day trading account helps to limit losses while simultaneously encouraging new traders to gain experience and make smart stock selections, but it requires a lot of strategizing since there’s not much room for error. Read on to find out about three of the most essential concepts to grasp before starting to day trade with a small account.
1. Stock Selection
Careful stock selection is one of the most important concepts to get down for entry-level traders with small accounts. With free online trading platforms growing in popularity, this group now comprises a significant portion of traders. The key thing is to choose only stocks that will protect capital, even if they don’t offer maximum profit.
There are thousands of stocks, mutual funds, and ETFs trading on today’s markets. Most traders choose between five and ten stocks to day trade and seek out stocks that have big upside potential. Pay attention to what professional traders are doing. The stock market is powered, to a surprising extent, by crowd mentality. When a promising stock starts making a move, more traders jump on the bandwagon and those who moved the fastest stand to make a good profit.
The thing is, traders with small accounts have far less room for error than professionals with huge bankrolls. If a stock looks promising and a few traders have jumped on board early in the day, go for it. If its value is already skyrocketing, look for other promising alternatives.
2. Risk Management
It’s just as important to know when to jump out of a trade as it is to get an intuitive feel for stock selection. Sometimes, it’s better to sell and trim losses before they mount. Most traders use stop-loss orders as a tool for managing risk. This order can be placed with a broker to sell a stock once it reaches a certain price, limiting traders’ losses on security positions. Stop-loss orders cost nothing to implement, so there’s nothing to lose by taking out this kind of insurance policy.
One of the key factors of risk management that often goes overlooked among novice traders is avoiding emotional influences. Don’t fall in love with stocks and assume that giving them another chance is the best way to recoup losses. In fact, delaying usually just leads to ever-mounting losses that can quickly wipe out a small account. Stop-loss orders take all the emotional influence out of risk management to avoid this problem.
3. Bull Flag Patterns
There’s no magic bullet for developing a trading strategy, but many experts recommend the bull flag pattern for small account holders. This chart pattern forms only when stocks are on a strong uptrend and have the following features:
- Strong moves on high relative volume
- Prices that consolidate near the top on lighter volume
- Breakout from the consolidation pattern on high relative volume
To use this pattern to full advantage, traders should buy when the stock breaks out of its consolidation pattern on high volume and place a stop order below the bottom of its consolidation pattern. Target profits are around 2:1 risk to rewards, which is a good benchmark for small account traders.
The Bottom Line
Getting good at day trading stocks requires more than just a desire to learn. It takes dedication, patience, discipline, and at least a little startup capital. All trades come with risk, and some losses are inevitable. The best way to get started is to open a small account and jump in.