I’ve seen online marketers and traders claim that “you can turn $10k into $100k in just a few short years using trading strategy XYZ”. Those messages are usually just scams that make the marketer rich by selling the dream. Here’s the simple truth. In order to succeed and make a decent living off of trading, you need to have a decent-sized capital base.
Sure, there will be the 1 in a 1000 trader who goes from $10k to $100k in 3 years. But that’s the exception and not the rule (there is also a ton of luck involved with that). The reality is that even good traders are happy to average 15% a year.
Here’s an example. Let’s assume that you need to make $50k a year pre-tax in order to survive. On a 15% return, that means you need a capital base of at least $333k!
Traders with small accounts should not focus on making as much money as possible. It’s extremely hard to become a well-off trader when starting with a small account. For example, if you have a capital base of $10k, it doesn’t really matter if you’re making 20% a year or 10% a year. That’s a difference of $1k, which isn’t going to make a material difference in your life.
Returns matter when you start to become a medium-sized or big trader. For example, if you have a capital base of $500k, a 20% return is $50k more than a 10% return.
Here are some things that small traders should focus on to become bigger and more successful traders.
Get a cheap broker.
Trading fees are much lower today than they used to be thanks to online brokerages. Online brokers can generally be divided into 2 types based on their commission structure: brokers that charge commissions per-share vs. brokers that charge flat-commissions.
Trading fees aren’t particularly important for large traders because these fees are small percentage-wise. But trading fees do matter for small traders because these fees can add up to a meaningful sum percentage-wise since the account is so small.
Get my book!
Some brokers charge commissions based on how many shares you trade. For example, broker XYZ might charge $1 in commissions per 100 shares.
Some brokers charge commissions based on the number of times you trade, regardless of your position size. For example, broker ABC might charge $8 per trade, regardless of how many shares you have in that trade order.
Per-share brokers are suitable for traders with small accounts while per-trade brokers are suitable for traders with medium-big accounts. It all just comes down to which broker is cheaper. It’s just simple math.
Let’s assume that you have a small account with $10k and you want to buy 100 shares of XYZ ($100 per share). A per-share broker that charges $1 per 100 shares will charge you $1 in commissions. A per-trade broker that charges $8 per trade will charge you $8 in commissions. As you can see, per-share brokers are clearly cheaper for small accounts.
Now let’s see what happens when you have a big account. Let’s assume that you want to buy 10,000 shares of XYZ ($100 per share). A per-share broker that charges $1 per 100 shares will charge you $100 in commissions. A per-trade broker that charges $8 per trade will charge you $8 in commissions. As you can see, per-trade brokers are clearly cheaper for medium-big accounts.
There isn’t a big difference nowadays between most online brokers. Some offer looser margin requirements while others offer slightly better trading software. But these are all just small concerns next to the commissions that brokers charge. Traders with small accounts should focus on finding a decent broker with cheaper commissions.
Commissions generally aren’t that big of a deal if you only trade a few times a year. But if you’re a short term trader who trades very often, then finding a cheap broker is of paramount importance. The commissions can easily add up to hundreds if not thousands of dollars each year.
Grow your trading capital via other methods
This is something that most “how to trade” websites don’t tell you. If your trading capital is small and you really want to take trading seriously, you should probably grow your capital via other income streams such as finding a side job.
It doesn’t matter how skilled you are as a trader. Trading is not really worth your time unless you already have a sizeable capital base.
Successful trading leads to exponential growth, whereas side hustles like part time jobs lead to linear wealth accumulation. For example:
- Earning 20% per year on a $100k portfolio means you’ll have $120k, $144k, $172k, $207k, $248k, $298k… As you can see, your trading or investment portfolio will compound on itself exponentially.
- Saving $10k a year from a side hustle means that your savings will go from $10k to $20k to $30k to $40k to $50k.
Linear wealth accumulation is faster than exponential wealth accumulation (i.e. trading) when you’re capital base is small. The red line in the following chart represents exponential wealth accumulation (i.e. trading) while the blue line represents linear wealth accumulation (i.e. a side hustle like a part time job).
This means that if you don’t have a large enough capital base to begin with, the best thing for you to do is find a side hustle that helps you accumulate wealth in a linear fashion. Save the income from that side hustle and put it into your portfolio. Once your capital base is big enough, focus on trading because that’s when the effects of compounding take over.
The key point is that traders with small accounts want to turn those into big accounts as soon as possible. This can actually be done more quickly by working on something else until you have enough capital in your account to make trading worthwhile. Use linear wealth creation (e.g. side hustling) when linear wealth creation is faster than exponential wealth creation (i.e. trading). Switch to trading when your base is big enough so that trading can be more profitable than linear wealth creation.
You can’t expect to make any life-changing amounts of money with a small account (e.g. $10k). Even traders who turned $10k into $100k by trading cryptocurrencies in 2017 lost most of it when the crypto bubble burst in 2018.
It’s better for small traders to focus on growing their trading capital base via side hustles and focus on learning how to trade.
Being a small trader is the best time to start learning. New traders should realize that losses are a part of the learning process. Many of the world’s most successful traders consistently lost money when they first started trading. It’s better to consistently lose money from a base of $10k instead of consistently lose money from a base of $200k.
A small account means that losses will not be life-changing for you either. This essentially means that you can test out many different strategies and not be too concerned by your losses. Do not be afraid of failure because some of the greatest lessons and improvements come from our mistakes. Test different strategies, tweak your strategy, toss out what doesn’t work and do more of what works.
Focus on one market
I said that traders shouldn’t trade or invest in too many different markets and asset classes at the same time. This is especially true for traders and investors with small accounts.
Trading too many different markets (i.e. diversification among markets) inevitably leads to mediocre performance. You will spread yourself too thin, which means that you won’t become an expert in any market.
Diversification leads to lower risk and also lower returns. As a small trader, you need big returns if you want to become a medium or large trader. You cannot excessively focus on minimizing risk when you don’t have much to lose in the first place.
The stock market is one of the easiest markets to trade because it has a long term bullish bias (the stock market goes up over the long run). This means that long-only traders have a natural advantage over traders who go both long and short.
Other markets like forex, commodities, and bonds are harder to trade. These markets spend most of their time swinging sideways in a wide range. Going contrarian is not as easy as it sounds because you don’t really know how wide this range can be.
Small traders and investors can become successful, but there are a few additional steps they need to take that medium and large traders don’t. They need to:
- Lower their trading costs by using a per-share broker.
- Grow their trading capital via other methods.
- Educate themselves and increase their knowledge/skills about trading.
- Focus on trading one market instead of diversifying.
Can you make a lot of money trading with a small account?
Yes, this is possible. Dan Zanger turned $10k into $18 million from 1998-2000 using William O’Neill’s CAN SLIM strategy. But these are the one-in-a-million cases, so the odds of you becoming this success story are very slim.
Dan Zanger got lucky in that he rode the dot-com bubble. These bubbles happen only once in a decade or two. Unless there is a massive bubble right now (like the cryptocurrency bubble of 2017), the odds of you making a lot of money trading with a small account are low.