I don’t know how many times I’ve had someone tell me that they lost their entire account of $10,000 or more, in a couple of months. Equally amazing is when someone tells me that they are going to quit their job and trade their $100,000 of retirement money…with no education.
Those things used to shock me, but now I understand that it is just how the world works. Survival of the fittest, if you will…
“A foole and his money be soone at debate: which after with sorow repents him too late.”
– Thomas Tusser
For people like you and me, who don’t speak Shakespeare, it simply means that a fool and his money are quickly parted. So if you don’t want to be a victim of stupidity…err, sorry…natural…selection, then it is vital that you start with a small account.
I don’t blame you. It’s like when you were a kid and your parents told you:
“…because I said so.”
Therefore, here are seven concrete reasons why you must start with a small account, if you want to become a successful trader.
1. Experience the Right Amount of Real-Money Psychology
In other markets like futures or options, you need a pretty big account, to have any shot at success. At least $25,000 to do it right. Even in stocks, if you are only paying $7 a turn for commission, that is still 14% of a $100 account.
But in FX, you really can trade a $100 account and get many of the same benefits of trading a larger account.
However, the key is that you are also not getting the negatives of trading such a small account…like you would in other markets.
Here’s what I mean…
Backtesting and forward testing are great, but they lack one vital element…
The visceral feeling that can only come with having some money at risk.
If you remember in Rafael’s interview, he mentioned that he knows a woman who can double her (relatively small) account every 2-3 months. But when they raised money for her and gave her significantly more, she almost blew out the account.
Money makes us weird, man.
So when you have at least a little bit of money on the line, you get to experience that feeling. If you don’t believe me, give it a try. Risk $100 in a demo account. Then risk $5 of real money in a live account.
The difference in anxiety level is huge.
Some traders like Colin Jessup actually recommend skipping the demo account and starting with a tiny live account, of about $100, from the beginning. This will allow you to experience the emotions that come with real trading, without risking a ton of money.
2. Lose Less Money
I hate to break it to you, but realistically, you will probably blow out your first account.
…and your second account.
…possibly your third. Hopefully, you learn better, by then.
That is just how human nature works. I’m making this statement after talking to hundreds of traders over the years, both pros and amateurs.
So if you start with a small account, you will lose less. It’s just a good business decision.
3. Learn Faster
What happens when you have $10,000 of total risk capital and you only open a $500 trading account?
Well, you now have $9,500 to spend on education!
…and that is huge.
There are excellent trading courses out there, that cost between $300 and $1,500. Take advantage of this and get educated.
If you went to college, think about how much more money you paid for tuition, books and housing. If you didn’t go to college, consider yourself lucky that you didn’t overpay for an education that you probably wouldn’t have used anyway (I’m speaking from experience).
You will pay for your education one way or another. At least if you get a real education, you stand a better chance of success.
The school of hard knocks can end up costing just as much as college.
Maybe even more 🙂
4. Get the Proper Tools
When you don’t blow your entire account on bad trading, you can invest in the tools that will help you progress as a trader. Obviously, there are a lot of different tools out there and it can be easy to get carried away.
But the one tool that I believe every Forex trader should have is Forex Tester. If you are more excited about funding your trading account than getting Forex Tester, that is perfectly normal.
However, spending a little money for the right tools now, will pay off huge later. When you learn to properly test a trading method, that allows you to see what you can expect from the system and will give you the confidence to trade it later.
Isn’t that better than having an empty trading account 3 months from now…and nothing to show for it?
If you have some backtesting under your belt, you will at least have a point of reference that can help you understand where you went wrong and how to correct it.
Again, if you trade nano lots, Forex allows you to trade accounts as small as $100 and still use proper risk management. That is impossible in almost every other trading market.
5. You Have to be Selective
Even though Forex gives you a lot of leverage, with a small account, you still have to selective with the trades that you take. So starting small helps you focus and only take the best trades.
If you are using proper risk management, you won’t take more than a few positions. If you have a larger account, it can be easy to start taking too many trades in different currency pairs.
Speaking of which…
6. You Have to Understand Position Sizing and Risk Management
There are two ways that this could go…
The first way is that you listened to #3 above, and you got some education. From this education, you learned how to size your positions correctly and you don’t blow out your tiny account.
The second outcome would be that you didn’t get educated and you blow out your entire account. Then you will hopefully learn the value of using the correct risk management.
Either way, you will get an education. Luckily, even if you make a mistake, you will still learn something.
…and not lose a lot of money because you have a small account.
7. Make Money “Faster”
I hope that you already understand that you are going to suck when you first start trading. I’m mentioning it again, because it can be a tough pill to swallow. Heck, you are probably going to suck for awhile.
…that’s just how trading works.
Actually, that’s how learning anything works. Think about what you would have to go through to be a professional jazz musician or a pro surfer.
But what happens when you blow your load on your first account and then have to get educated and open another account with whatever money you can scrape together? Well, when you do learn how to trade well, you are going to have much less leverage to compound your account.
For example, let’s stay that you have saved $25,000 to fund your “dream” trading account. However, you only risk $1,000 to start, and take it from there.
You will probably blow up your first three accounts and you will pay for some education. Still…after all that, you will probably “only” spend about $6,000.
When you get good at trading, you now have a $19,000 account to trade. When you are consistently profitable, that can compound very quickly into a monthly income that can have a serious positive impact on your lifestyle.
Now contrast that to blowing $25,000 on your first account, then having to save $1,000 to open your second account. Let’s say that it takes you 3 months to save up that money.
It will now take you at least 18 months to get that same $6,000 that you would have spent in the first place. However, with all the starts and stops along the way, you will probably take a lot longer to become consistently profitable.
The “faster” route usually seems slower at the beginning.
So those are all of the reasons why you should start trading with a small account.
I know, I know…
It can be tempting to put all that money in play and dream about how much you can make from it. But the sooner that you realize that you need to start small, the better off you will be later on.
This is not gambling, your are developing a skill. Now get out there are and go to work!