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Can You Trade Forex Well with a Small Balance?

Can You Trade Forex Well with a Small Balance?

2014-05-06 03:00:00
Tyler Yell, CMT, Currency Strategist
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Talking Points

-The Desire to Trade FX with a Small Balance

-The Limits of a Small Balance

-The Better Path Regardless of Risk

“Ninety-five percent of the trading errors you are likely to make—causing the money to just evaporate before your eyes—will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table. What I call the four primary trading fears.”

Attitude produces better total outcomes than analysis or technique.

― Mark Douglas, Trading in the Zone

What’s the least amount I can’t start trading with? That’s a common question running through a trader-to-be’s head when they’re about to open a trading account. However, you’ll soon see how that line of thinking can breed a lot of poor thinking patterns and get you in trouble.

The Desire to Trade FX with a Small Balance

Can You Trade Forex Well with a Small Balance?

Let’s start off with some tough love. You’re not trying to buy something at a discount when you put down margin for a trading account. Less is not more and as you could understand, less is less. Put in other words, the attitude that comes with trying to get the best deal on a large purchase can do damage to your trading.

Here’s how. The attitude you trade with will follow through to how you manage risk and in keeping that mindset, you’ll likely overleverage your trading account and potentially be forced out of trades at the worst possible point. A better approach is to ditch the focus on a win percentage and instead focus on preserving capital / downside risk as opposed to a key juncture break long before an extreme pressed you out of the market. This new attitude that focuses on risk often produces better total outcomes than analysis or technique alone.

The Limits of a Small Balance

There’s a reason Hedge Funds don’t start with $5,000 or $50,000 or even $500,000. That’s because they know their inability to enter into a position with favorable risk: reward is directly tied to limited capital. Now, before you think, “I’m not a hedge fund so that doesn’t concern me,” think about this. Everyone is trying to extract money from the market while risking as little as possible however, there is an amount of agility that is needed to trade well and put the odds in your favor.

In short, a small trading balance limits your agility as a trade. Acute observations from traders with small balances show common traits that limit agility and your edge as a trader:

  1. Lottery Mentality –always looking for the big winner
  2. Taking on too much risk relative to appropriate reward sought
  3. Overt focus on the short-term which can have less order than longer term moves

Agility is a mindset that traders need to have are often doomed without. When you’re agile, you’ll have the ability to pay attention to what matters most in trading, which is exploiting an edge in the market while always limiting risk. Of course, there’s an easy way to do this without trying to find a psychologist to change your mind frame.

The Better Path Regardless of Risk

Always think risk first regardless of your account balance. However, the more trading capital and usable margin you have, the easier it is to stay level headed and agile as the market moves. It’s been said that to enter a trade without a clear risk-point in mind is reckless and I agree. However, the more usable margin you have, which goes hand in hand with a larger account balance, the less you’ll keep holding out for the big winner and rather look for fewer high probability trades. Here’s a look from the Traits of Successful Trader’s Research that shows the correlation to high balance and better performance

Can You Trade Forex Well with a Small Balance?

Courtesy of Traits of Successful Traders

The graph above shows a clear pattern: the less equity you trade with, the more prone you are to use high amounts of leverage. The more amount of leverage you utilize, the more focus you’re likely to have on short-term gains. The only problem with an overt focus on short term gains with high leverage is that you’re unlikely to take a small loss in the near term which can eventually lead to a huge or devastating loss before long.

Closing Thoughts

Starting with a small account can become one of the most expensive ways to get started. This article has opened up many of the mental traps that lurk for those trading a small account. The question becomes, are you willing to take trading seriously enough to protect your mental capital and align yourself with those who have made a success in trading before you?

I hope your answer is yes.

Happy Trading!

---Written by Tyler Yell, Trading Instructor

To contact Tyler, email tyell@dailyfx.com

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Tyler is available on Twitter @ForexYell

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