In today’s Simply Answered, Simply Explained series, Bryan Bottarelli will go over some trading tips and address one of the most common trading questions for beginners: How Do I Trade a Small Account?
If you’ve just opened up a new Robinhood, E-Trade or TD Ameritrade account, this video is perfect for you.
5 Trading Tips to Grow a Small Account
Trading Tip #1: Trade What You Already Know
Whenever one of my friends comes to me and says they just opened up a trading account – and they ask me “what stock should I buy?” – my answer is always the same. Invest in a company you already know.
Here’s what I mean… For my softball buddies – I tell them to buy a stock like Anheuser Busch Inbev (NYSE: BUD) or Nike (NYSE: NKE). That way, when they notice more 21-25 year old’s drinking Bud Light Lime, or when they see their wives buying more Nike running shoes….they can develop the skill of turning those observations into profits.
Or for all your ladies out there, imagine if you bought Lululemon (Nasdaq: LULU) stock the same time that you bought your first $100 pair of black Lululemon yoga pants? Over the last 10 years, LULU stock has gone from $20 up to $300. That’s a 1,400% gain. Every $5,000 in LULU would now be worth $70,000 today.
It goes to show you when you’re starting out invest in what you already know. The last thing you want is to get your money tied up in some complex technology that you know nothing about. For me, whenever some tech guy starts talking to me, it sounds like the teacher from Charlie Brown.
So here’s my rule… when you have a $500,000 trading account – and you can throw some speculative money into 2,000 shares of Cloud-Space Gizmo.com – sure, roll the dice. But right now, when you’re first starting out with a small account – Keep. It. Simple. And that means Trade what you already know.
Trading Tip #2: Position Size Like a Seasoned Wall Street Pro
The second you open your new trading account, I know you’re super excited. You’ve been on the chat boards, you’ve seen the Reddit users saying how they grew $1,000 into $20,000 in 18 seconds and you’re eager to ring the register alongside them.
But here’s the thing… trading is not a sprint. It’s not a marathon either. Trading is a game that never ends. Each new day comes with new information. New opportunities. And new ways to profit. Therefore, you must always have “dry powder” on hand to move into the very best opportunities, as they present themselves. The way to do that is to Position Size like a seasoned Wall Street pro
Here’s my general rule… for a small new account, let’s say you have $1,000. For each new trade, allocate 5-10% of your total account value for each new play. So, you may have a few shares of Nike and a few shares of Budweiser, and that’s 20% of your account. That leaves you 80% of trading powder to play with.
So then if something juicy presents itself – like you find the next LULU trading for $20 a share – you have the ability to make that play as well. Nothing is worse than missing out on an explosive winner just because you didn’t have the ability to jump in.
If you miss those opportunities, that ship has sailed. So please, don’t be that guy standing on the dock holding his suitcase with a sad face while the boat is approaching the setting sun and the passengers are all toasting champagne. At the same time, you also don’t want to be that guy who sits down at the poker table, gets dealt his first hand, sees one Ace, gets all fired up and shoves all in. That sort of untamed aggression rarely pays off.
So, as a new trader, stick to the allocation model of 5-10% of your total account to each new trade. As you grow your account – and you get more comfortable with investing – you can most certainly adjust these percentages. But to start out it’s critically important that you position size properly. As odd as it may sound, this will actually help you make more money with a much, much higher winning percentage.
Trading Tip #3: Define Your Risk Ahead of Time – Then Don’t Freak Out
When you’re just starting off, especially with a small account, you really don’t have room for error. You’re entering this new game which could be pretty darn stressful. Investing and trading… it’s all a new experience for you. And you have skin in the game. Your hard-earned money is now “in play!”
So, here’s a common mistake that I see which scares a lot of people off. They make their first trade – and inevitably – it goes down. You see some red. So you get scared, freak out, panic sell at a loss and never trade again.
Look, I know the feeling. It happens to everyone. In many respects, I’m convinced that Wall Street is designed for the sole purpose of making you second guess yourself. But, there’s an easy way to resolve this. So my message to you is simple. If you define your risk ahead of time, you won’t freak out.
Here’s what I mean. Say you buy $500 worth of Nike. Right away, on day one, set your total downside risk at something you’re comfortable with. I’d recommend 20%. If you’re $500 worth of Nike goes down to $400, you’re out. No questions asked. Sure, you lost $100 which sucks. But that won’t bankrupt you either.
Markets can be volatile. There will inevitably be days that the market sells off and you’re showing a paper loss. But again, don’t freak out. Remember a few things… First, you haven’t officially “lost” until you decide to sell. So, if you see a 5% drop on any given day, you know that your total risk is defined ahead of time. So, you won’t get caught up in making an emotional decision.
And Second, If you know you total risk from day one, then you’ve already made the smart, disciplined move and planned ahead. So, on the day that the markets drop because a tree happened to blow over in the woods – and it landed on a butterfly’s wing and killed it – which in some odd way pushed the markets down that particular day, you won’t freak out because you’ve already prepared ahead of time.
This eliminates making trading decisions based on emotion, which already puts you well ahead of every other new trader.
Trading Tip #4: Never Ever Second Guess Taking Profits!
Here’s a little secret… Nobody in the history of Wall Street can consistently buy at the exact bottom and sell at the exact top. Nobody!
So, don’t ever beat yourself up because you couldn’t pin-point the exact top or the bottom. Sure, we can all come darn close but being in the general “vicinity” of the bottom – or the top – is more than admirable.
Ok, so let’s say you got in around a bottom and your stock is rising. You’re happy with your profits. Things are going really well. You’ll soon find yourself asking, how long can this party last? Should I sell and lock in a gain? Or could there still be a lot more upside ahead? Again, I’ve been there.
When it comes to taking profits, you’ll always find yourself with an angel on one shoulder – and a devil on your other shoulder – each talking into your ear. The angel is saying don’t be greedy. Take your profit. Be smart! The devil is saying you idiot you’re leaving money on the table. Hold for more!
How do you resolve this? Luckily for you, I have a solution… sell half of your winning position. This accomplishes two things. First, it locks in profits. This is something that you should never ever second guess. And second, it still allows you to be “in” for any further possible upside. It’s the best of both worlds.
Trading tips like these are tricks you need to have in your back pocket. Sell half then let the second half run. But if that remaining half starts to dip – I say 10% below your first exit – then close the rest out entirely. Nothing is worse than watching winning position turn negative. Don’t let greed take ahold of you. You’ll avoid that, if you stay disciplined. Stay smart, sell half and never second-guess taking profits.
Trading Tip #5: Find a Trading Community
Last and final trading tip…. Find a group of like-minded traders and collaborate with them. This is the very best way to learn how to make money day after day. You see, many of the world’s most successful traders were mentored at one point or another.
I started off trading on the CBOE pit. I had two powerful mentors showing me exactly how they traded every single day. And I can tell you firsthand, for me, nothing is more powerful than a group of people all making money together. And it doesn’t have to be in a CBOE pit.
If you’ve ever been in Las Vegas, seen people going crazy and high-fiving each other at a red-hot craps table, then you know what I mean. Let’s face it, trading can be a lonely game. You’re at home at your command center trading the markets.
If you hit a big winner, you fist pump yourself and give an air high five to your imaginary trading partner. That sucks the joy out of winning. But if you have a community of traders – all wining together – it’s one of the most powerful feelings in the world.
That’s why I’ve created a live trading community called…
THE WAR ROOM – CLICK HERE TO FIND OUT MORE
It’s one of the most elite collections of traders ever created. Each morning, from all over the world, traders log in and share their very best ideas. Our one and only goal is to make winning trades.
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About Bryan Bottarelli
Bryan graduated with a business degree from the highly rated Indiana University Kelley School of Business, and his first job out of college was trading stock options on the floor of the Chicago Board Options Exchange. He was mentored by some of the country’s top floor traders in the heart of the technology boom from 1999 to 2000, where he learned to identify and implement some of his most powerful trading secrets. Now he shares his secrets with a group of elite traders. We will be republishing some of his highly sought after content from his free e-letter, Trade of the Day.
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