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Zen & the Art of The Small Account
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Zen & the Art of The Small Account

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Zen & the Art of The Small Account

I think most of us here on Big Mike's have smallish accounts. There are many who say its impossible to be profitable with a small account. I think they are 95% right. However, for many of us, its the hand we are dealt and therefore we must use it wisely.

This thread will be two parts: 1) My journey to turn a small account into my source of income and 2) The Zen, the Tao, the Art of managing a small account.

We will discuss money management, psychology, fear, greed and the never ending quest for the holy grail of trading. Yes it does exist! It's just not what you thought it was!

In the next two posts, I'll detail for you where I am in terms of account size, my strategy and then as I progress, I'll update you on the good, the bad and the simply ugly. That will be the first post.

In the second post, I will give you what I think are the essential rules to live by when trading a small account.

Then hopefully, those of you who are willing to join me in my journey of transparency will begin contributing, encouraging and engaging in what I hope will be the path toward being in the 5% who make it.

I should have both posts up by the close of the weekend......


Here we go.................

Before I forget, I have my regular journal in the elite section. If you are curious to read that one as well, just join the elites here on futures.io (formerly BMT) and you have access to some of the best traders around!

Simplicity is the ultimate sophistication, Leonardo da Vinci


Most people chose unhappiness over uncertainty, Tim Ferris
 
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Account Size, Strategy etc....


Here goes....

So my account size started at $5,000. Its all I had left after a 15 year mortgage career that both made me almost "rich" and then took it all away. I got close. I made over 2 million dollars over a 6-7 year period. I owned commercial real estate, no debt other than my house, traveled a lot and gave a lot of money away.

But when the real estate collapse happened here in Arizona, it took my brand new mortgage office I had just opened with $250,000 of borrowed money and flushed it down the toilet. I lost the mortgage business, an Allstate insurance agency I owned, $1,000,000 of commercial real estate and filed a business BK to keep the creditors from taking everything else. I got off easy. Many of my friends lost their wives, their kids and one guy I know was homeless for a bit. I managed to keep those things and my health as well. I am fortunate!

I tell you this so you know where I am coming from. I know how to make $25-40K a month. I've done it once and I think I can do it again. The first time I did it, I did it in a business I knew nothing about but learned very rapidly. Just like in trading, the mortgage business was all mental.

The account size is no longer $5,000. I have refunded it a couple of times over the last year. The guy that got me into trading said it would take $10,000 and a year to "get it" and become profitable. It has taken every bit of that.

But I thought I was too smart for that. After all, I was in financial services, I traded interests daily and was very good at it. But my time horizon was always a month out, so I guess you could say I was swing trading rates. Trading against the customer that is.....so I figured I could do it in 6 months. LOL....that is funny. Shows you what being arrogant will get you. Frustration in spades.

Fast forward 16 months to today. I am finally beginning to show some consistency on sim. I decided to trade my small sim account as though it were my actual account for a month. In other words, if I could develop an edge in sim, I can do it with real money.

Even though my account is not $1,000 that is the amount I will start with for this journey. Why, because at one point, my account was down to $1,000 and that's when I decided to find out how to trade instead of chasing the holy grail. That was about 4 months ago. You can read my elite journal (aztrader's journal) if you want to read more about this. I figure some of you are at the $1,000 level and are desperate to find out how to make that $1,000 blossom into a stead income.

This post will include my daily trades, my thoughts, and a spread sheet tracking my equity curve.

I am not perfect. In fact, I'm probably not the person to have this thread. But I had the idea and just went with it. Here is my promise to you. I will be 100% transparent about this journey. Nothing held back. If it happens, you know about it. In return, please be honest with me as well. It'll be good for the thread and others will benefit from your thoughts as well.

I hope you find value in this thread.....please make sure to leave me your feedback. Its important.

Next post is about what I think are the essential rules and strategies for turning a small account into a living.

Start small but think big...thats what I say!

Simplicity is the ultimate sophistication, Leonardo da Vinci


Most people chose unhappiness over uncertainty, Tim Ferris
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I am glad you are doing this.

Although the undercapitalized are at a severe disadvantage. Some can make it.

A long time ago I listened to a top trader talk about training someone to trade. Said he rather take a person who was diligent in money management and give them a small account, with restriction of 1 car, to prove themselves. Because then it is all about the trade.

Once it is all about the trade the $$$ don't matter.

R.I.P. Andy Zektzer (ZTR), 1960-2010.
Please visit this thread for more information.
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Thanks

Great idea for a thread. I'll be checking in.

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The Essentials

Oh man, this could be a long one! But I will try to bullet point it so its easy to read:

Trading a small account requires a slightly different approach than trading a very large account. For the purpose of this thread, lets define small as less than $10,000. If you want to define it as less $20K or $100K, thats fine too. I think account size may be relative but I know for those with small <$10K, accounts, the concepts and struggles are different than trading with a very large sum of money.

Lets begin by describing some of the issues:

1). We often feel the need to be "right" on every single trade as every bad trade has serious consequences. The issue is this; in our heart, we know we cannot be 100% right and so we often just don't trade.

2). We think we have to have the lowest commissions out there so it does not eat into our trading capital.

3). We think we can double our account in a month. (yes it is mathematically possible but improbable)

4). Because of our need to be right, we spend a lot of time searching for the mechanical or automated system that will be right for us.

5). We often shade or hide the truth from our significant other as it relates to how we are doing with our trading.

These are just a few of the issues all traders face but those with small accounts really struggle harder with them.

We can discuss these and others at length in this thread.

So here is my first attempt at the essentials:

1.) We must be brutally honest with ourselves and with those around us. To do otherwise will put an emotional short circuit in our brain and cause us to be self defeating. Be both your own worse critic in terms of self analysis of how and why you took the trades you did and be your own best cheerleader in celebrating your small victories. Believe me, sometimes you may be the only one cheering. By the way, make up small victories if you need to in order to keep momentum going your way.

2). We must stop looking for an external holy grail and discover the truth that the only way to success in trading as in life is to master ourselves.

3). We must accept that in order to make a living as a trader, we must realize and acknowledge that risk is an inherent part of what we do and we will be wrong many times.

4). We must take our losers like a man (or woman), not beat ourselves up over it and move on to the next trade.

5). We must take a payday when the market offers it to us (excerpted from Trading in the Zone). In other words, don't get greedy. The truth is, with a small account, you cannot bank on a big winner every day to make your money for you. Instead, you must rely on multiple small winners. Small accounts=small winners. Baby steps and let them pile up. Some people have the ability to just take a trade and let it ride for a long time, but most of us need some affirmation in the form of a winner pretty early in the trading day. Go ahead and take that small winner, it feels good and it sets the stage for a steadily growing confidence in your system.

6). We must "OWN" our system or edge. Buying one, borrowing one or otherwise depending on someone else to develop a trading system and methodology will never work. Why? Because you don't trust it because you don't fully understand it. Developing your own system or method will allow you to trust.

7). Due to number 6 above, it is my personal belief that all small account holders should commit to at least 4 weeks and probably more developing a system that works for you, then learning how to really produce consistency over time before you start risking real money. If you constantly change systems, add or remove indicators or in anyway continually tinker with your set up, methods or systems, you'll never dial in the consistency you absolutely must have to make a living. I am currently in my third week of doing just this. So far, so good. I am profitable after 111 trades. I'll talk more about this later on.

8). Treat your sim account like real money. If you can't trade 10 contracts due to fear or under capitalization, don't even think about trading 10 contracts in sim. If you blow your sim account out, be honest about, reset it and start over from scratch. In other words, your four week period starts over. Keep it up until you can trade an entire month with the same sim account and make money doing it.

9). Keep a journal. This is by far and away, the most important thing I could tell you. Detail your thoughts, emotions and trade logic. If you do, a pattern will be to appear and you can make intelligent decisions from those patterns. I'll post the ones I use in a later post when we talk more about journals. Suffice to say, never lie to your journal.

10). Lastly, be accountable to someone besides your self. We tell the largest and most frequent lies to ourselves. But find someone you can look in the eye, tell the truth and not get beat up. They must be supportive but at the same time have that ability to demonstrate the tough love so many of us require to stay the course.

There are more of these but this will suffice for now. We will talk about these and more as well as money management, how to get and keep mental discipline, how to ensure you stay healthy if you are in front of a trading screen all day, and whatever else you want to discuss.

Have fun this weekend and here's to successful trading next week.

Simplicity is the ultimate sophistication, Leonardo da Vinci


Most people chose unhappiness over uncertainty, Tim Ferris

Last edited by PandaWarrior; June 18th, 2010 at 08:19 PM. Reason: Add a couple of points....
 
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Expense Ratio

You hit on commisions, but a bigger issue is total expenses as a ratio to your account. If you have a $5-10K account, it is hard to overcome $500 of expenses each month for data, charting, trading room, mentoring, indicators, network access, or whatever. Most people with small accounts are frugal, but be sure you are including all expenses, especially if you are paying those expenses from a source other than your trading account. If you are using another source for expenses it can be easy to fool youself that you are profitable. With a larger account this is not as important, unless you start buying bigger toys.

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I believe that the holy grail is the power and depth of the human mind. Its inside all of us. We just need to learn how to access it and control it.

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aslan View Post
You hit on commisions, but a bigger issue is total expenses as a ratio to your account. If you have a $5-10K account, it is hard to overcome $500 of expenses each month for data, charting, trading room, mentoring, indicators, network access, or whatever. Most people with small accounts are frugal, but be sure you are including all expenses, especially if you are paying those expenses from a source other than your trading account. If you are using another source for expenses it can be easy to fool yourself that you are profitable. With a larger account this is not as important, unless you start buying bigger toys.

You are absolutely correct. For some, that expense will be small. For instance in my case, its around $100 a month for data, internet and some news letters I read. I don't belong to a paid training room although I did at one time. At this point, I am not convinced they are worth it although I am sure there are those that would disagree with me. I don't buy indicators anymore although I have paid for them in the past....that will never happen again unless someone can prove beyond all reasonable doubt that it is a sure fire thing....

A couple of things I intend to spend money on in the future is a trading coach, I have one picked out already but can't really afford him, a better trading computer although this is not really necessary and I would like to attend some industry events occasionally. Beyond this, I really don't see myself spending large sums of money. At least not like I did in the mortgage business where I needed $80K a month to break even.

One more thing to consider, if you start making money, you need a good CPA,one that specializes in trading, I have no idea what that will cost but I know I spent $10K a year on my CPA back in the day. I would suspect that at some point, I'll spend that much again keeping my trading business on track.

Simplicity is the ultimate sophistication, Leonardo da Vinci


Most people chose unhappiness over uncertainty, Tim Ferris
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chipotlebop View Post
I believe that the holy grail is the power and depth of the human mind. Its inside all of us. We just need to learn how to access it and control it.


That access is obtained through belief and action. I believe if you are supremely confident in yourself, take massive disciplined and focused action, you can do anything. It may be harder than for others depending on your natural skill set, but it can be done.

Simplicity is the ultimate sophistication, Leonardo da Vinci


Most people chose unhappiness over uncertainty, Tim Ferris
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