When it comes to retail traders, one of the biggest differentials between them and institutional traders as well as professional traders is the size of their trading accounts. This makes for huge differences in the way that these traders will have to approach their situation, but at the end of the day mathematics teaches us that the differences between these accounts cannot be overcome.
The reality
I’m not trying to dissuade any of you from trading but you need to understand that there is a huge difference between trading a $10 million account and a $1000 account. For what it’s worth, the average retail account in the United States is somewhere near the $2000 level, and I suspect that in other countries is much lower. This is because unfortunately Forex is sold as a “get quick rich scheme”, by the layers upon layers of people who have an interest in taking your money, in one form or the other.
However, it is true that you can make money much quicker in the Forex markets then you can many others. This is because of the leverage, and the fact that markets tend to trend for a very long term. In fact, it’s quite common for a currency pair to trend for three years at a time. However, mixing that with the leverage is both a good thing and a bad thing.
The advantages
Let’s start with the advantages of trading a small account. The most obvious benefit to trading a small account is that you do not need to worry about moving the market against yourself if you jump in and out of it. If you are trying to close out a 10,000 unit position, you are going to have much trouble doing so at just about any price. However, if you are trying to trade 100 million unit position, it’s an entirely different situation. In this sense, the small trader has much more flexibility when it comes to putting a position on or off.
Another advantage is that if you do get wiped out, it shouldn’t be a crucial mistake in life. After all, the average person that is trading currencies can handle wiping out an account if it’s small, but then again the biggest problem that you are going to have is going to be relative to your financial situation. For example, if you have a net worth of $3000 when trading, and have a $1000 account, that could cause an issue. In that sense, the statement of a “small account” comes down to an individual situation.
The other advantage of trading a small account quite often is that you will be offered larger amounts of leverage at your broker. In that sense, it does give you an opportunity to make more money with a small input, but the problem is of course high leverage will quite often lead to large losses. Again though, having said that, if you are risking a few hundred dollars and it doesn’t make any difference to your livelihood, that risk may be advantageous.
The disadvantages
There are a multitude of disadvantages for a small account. The most obvious one is that it’s going to be difficult to make the rewards worth your time. For somebody who makes $100,000 a year, it’s not going to be exciting to gain $100 at the end of the same year through trading. This comes down to patience, and whether or not you have any. Most people I know don’t. This is why most small traders have major issues, as the lack of significant reward makes it difficult to stay focused. This leads to over trading, or over leveraging your position.
Depending on how small your account is, you may not be able to weather the storm of a major pullback or timeframe that features a lot of volatility. This is because your stop losses will have to be too small. Beyond that, it’s very likely that you will continue to over love yourself, thinking things along the lines of “I only need to take a couple of crazy trades, then I can trade normally after I have built up my account a bit.” Needless to say, this is bound to backfire, as the emotions of watching a huge swing in your profit and loss column will make you make bad trading decisions. Even if you do get that sudden burst and the ability to make a massive game, it’s very rare that a trader can cut back their position size after winning like that. Greed eventually takes over, and then the broker gets all of your money.
The solution
Obviously, you are going to do much better with a larger account. Think of it this way: if you make 1% on a $10,000 account, that is $100. That is much more sustainable and likely to happen than trying to make 10% on a $1000 account. So the solution is obvious: trade with a larger account. No, I am not joking.
The way to get to larger account sizes is something that most people don’t want to hear, taking your time. You can build up your account in a gradual and responsible manner, while adding to it along the way. Perhaps you can put $100 per week into your account to pad the balance. Eventually you can find enough trading capital to make a difference. That’s the biggest problem that most traders face in the trading markets, they simply do not take the time to make it all work. After all, your retirement accounts, which are run by professionals in large firms, seem to be okay for you making 10% a year. However, as retail traders we expect to outperform so many of the professionals that have huge advantages over us. Trading capital is crucial, so you should worry about preservation first, and then add to it once you prove yourself capable of making profit. It’s probably not the word you’re looking for, but the reality is that trading a small account is very difficult.