Growing a Small Account – Limiting Beliefs That Hold Traders Back
Last time we talked about some important tips for growing a small account quickly through short-term swing trading. Today we will discuss the common limiting beliefs and trading misconceptions holding a lot of traders back from attaining the life they want.
Limiting Belief #1 – My Account is Small so I need to Trade Low Priced Stocks
Over the years, I have heard this countless times from people and it shows what a good job some do in promoting penny stocks and options and not sharing how statistics and reality affect your account growth over time.
First of all, its easy to take a profitable trading strategy and turn it into a losing strategy just by lowering the win rate and introducing other risks. One overnight capital raise or halt and you can be starting all over again.
With low priced stocks, especially those in multi-year downtrends or sideways trends with occasional spikes, the win rate for the top chart patterns is lower when going long. Every back-test we have done and our own 15 years experience trading shows this over and over.
If you use the kelly formula or another method to determine your optimal position size, you see how quickly the optimal position size drops when the win rate drops. We covered this in the last blog post covering tips for rapidly growing a small account.
Over the years, I personally have gravitated toward much lower position sizes on those trading opportunities that I know are less than ideal – including stocks under $10. Not coincidentally, the kelly formula shows that the optimum position size can easily go down 70% or more when the win rate falls substantially.
So, if your position size for an ideal trade is $4,000, then the ideal position size for a less than ideal trade with a lower win rate might be $1,000 or something a lot less than $4,000.
Now keep in mind that the kelly formula is optimizing for account growth over time. Its not optimizing for risk adversion over time. So the lower position sizes with lower win rate trades actually deliver faster account growth over the long-term according to the kelly formula versus larger position sizes once the win rate falls.
So just by going long (buying in hopes of selling higher) lower priced stocks and penny stocks, you may have to cut your position size by 50% or more for optimal account growth.
So why trade low priced stocks in the first place when you have other higher priced stocks with a higher win rate and lower risk where you really should put on a much larger position size for optimal growth?
When you tell someone this, they think “Yea, but I’ll have to wait forever to build a small account that way!”
Well, here is a chart of account growth starting with $3,000 if you average 6% per trade for a short-term swing trader who averages less than 3 days in a trade going for a 6% to 20% profit while using a 2.5% stop right after a big catalyst or great technical pattern entry point.
You could do 100 short-term swing trades in a year or two when the average hold time is 2 days or less. The average time to reach the first profit target out of the high tight flags we trade is less than 2 days and the best earnings gap trades take less than 2 days as well to move 6% to 15% from the entry point.
Again, its the big winners that skew your average profit on winning trades. For example, SMCI gapped over our price target in January for a big 35% profit in just 2 trading days. Actual equity growth curves from great trading look more like what was in the last blog post with strong periods of growth followed by sideways to lower consolidations.
As with investing, you can put the profits into your next trade and take advantage of compounding during a bull market. As you can see, if you can trade with a tight stop-loss and average 6% per trade, you can build a small account very quickly during a bull market.
Limiting Belief #2 – I Have to Have Diamond Hands and Not Take a Loss
Again, as explained in the last blog post, most traders will go through flat to down-trending periods before a big wave higher in their equity curve. This is the norm when swing trading at a high level and the big surges in your account size usually correspond with market uptrends.
But good traders stop out quickly when they should to reduce drawdowns. They also trade only the best opportunities with a big catalyst instead of being all over the place.
Think 2 ideal trades per week.
Our earnings eruptions strategy generally plays out within a day or 2 and uses a 2.5% to 3.5% stop with a high win rate. The high, tight flags we trade usually hit the first profit target within 2 trading days as NVDA did right after we featured it a week and a half ago.
If you average 3% per trade, you would just need twice as many trades. So 200 trades versus 100 trades to reach about a million dollars starting with $3,000 while averaging 3% per trade, averaging the winners and losers.
You would need far fewer trades if you are just looking to hit 6 figures. So why bother with low priced stocks where you risk a halt disaster, a big short squeeze if shorting, or an overnight capital raise that tanks the stock and takes you back to square 1?
So, yes, you can do very well while avoiding risky low priced stocks, options and margin. In fact, your chances are better. But only if you stop out when you should and know where you are stopping out before entering the trade if it goes against you.
Limiting Belief #3 – The Stock has Gone Up a Lot so the Opportunity is Over
This may be true for a long-term investment and low priced stocks but you definitely want stocks with an established long-term uptrend near highs when swing trading. We covered this in a recent post going over overhead resistance.
Several weeks ago we featured both CAG and FSLR in bottoming base patterns to customers. FSLR has soared 50% higher within a few weeks after we featured it.
Why did FSLR move so quickly? One of the reasons is that it was within 30% of the highs without too much overhead resistance. It also had a powerful base pattern and reached a good technical entry point with very bullish news coming in the form of new tariffs on Chinese imports and big tech making plans to use solar to power all those new AI data centers.
The key is to find great long-term uptrends on stocks with real fundamental results that support the move. This avoids big penny stock and low priced stock rug pulls which kills your progress quickly.
Then look for a great base pattern and then a fresh catalyst with a good technical entry point on these higher quality growth stocks or even value stocks with a low valuation. This is where you can find a great win rate while using a tight stop-loss, lower risk and have a much better trading experience. You can also sleep much better at night.
Ask any trader who has been trading for decades and they will tell you to look at the new high list for good trading candidates. The new low list has choppy traders with more risk and longer hold times to make a sizeable move. If that even happens. After all, they are near the lows for a reason. When trading, you want short-term AND long-term momentum in your direction.
SMCI was near all-time highs when we featured it to customers early last year coming out of a bear market. Not lows. The stock soared 1,500% over the next year.
Remember when we showcased ABNB on the blog early this year? This was a stock closer to the lows and easily went 10% higher within a few days from the technical entry point we pointed out at the time for a great swing trade. It made this move very quickly after publication of the blog post while holding a very tight 2% stop below the technical entry point once it was reached to trigger the long trade.
A few months later the stock is below this target and still languishing. This is more common in bottoming bases far off the highs.
We want a great long-term trend, with the stock near the highs and then a bullish consolidation pattern before the price reaches a good technical entry point in the base.
Limiting Belief #4 – Buying Options is a Great Way to Magnify Your Gains
No, buying options is a great way to take a 3% or 5% average profit and turn it into an average loss.
Buying options is just a tougher game to win. The truth is that option values erode over time with all else being equal.
So the price of the stock could go up a little over the next few days and the option price could actually go lower.
But options are worth considering for a homerun opportunity. A good example over the past couple weeks was NVDA breaking out of a high tight flag after big news. We featured NVDA to customers right after the news.
Another could have been AMSC when it reached our entry trigger on Thursday morning.
AMSC soared 14% higher from the entry trigger and hit our first listed profit target within an hour after a big catalyst. So, the stock opened on Thursday morning, hit the entry trigger price right away, and then exploded another 14% higher very quickly.
The prior week, we had VRT as a top opportunity in the alert service. The entry trigger was just buying at the open on Tuesday. The stock opened on Tuesday and then surged 14% higher by Friday while not pulling back more than 2% below the entry point.
One thing to understand about options is that option values fall quickly after an earnings event so you have to deal with that for those stocks that do not move as much. So, again, it can take a profitable strategy and make it unprofitable.
If you are not willing to do 100 short-term swing trades trades over a year or two (say, 1 to 2 trades per week on average) than you are not really serious about growing a small account quickly. The best traders in the world took years to make their first million. Buying options before you are really skilled at this is usually a recipe for losses but, hey, its a free country.
But do you absolutely need to use options to average 5% per trade? No way! And you do not want to take your edge and throw it out the window because of option time decay.
I would much rather use 2 to 1 margin than trade low priced stocks or options any day. I have been trading long enough to know that.
Buying options makes winning harder.
Limiting Belief #5 – I Don’t Have Time to Swing Trade
Having a service like ours saves a lot of time in building a good watch list and learning great strategies.
You still need to check your watch list each day, check the news, decide on your position size, put in your stop and limit order after you enter the trade and check the stock sometime in the evening. You also need to review your completed trades on a regular basis and find ways to improve and clean up your tendencies that are holding you back.
When focused using a great strategy and having some discipline to make your trading process into a consistent daily routine, you can do very well over time. But, yes, it takes time to learn the strategy, manage risk and become good at it over time.
If you only want to spend a little time on one day per week, a great ranking strategy is a good way to go. Our top ranking strategy has an exceptional 12 year track record and only requires a little bit of time on 1 day per week.
Limiting Belief #6 – I Have to Avoid the Pattern Day Trading Rule and Deposit My Money in a Sketchy Offshore Broker or Trade Options
One of the best traders of our time took a few thousand and turned it into a $100,000,000 in about 10 years by trading stocks – not options. He made the vast majority of his money swing trading – not day trading. He reached the $100,000,000 milestone just recently.
He started day trading and then switched to swing trading. And he also stated recently that if he were a new trader starting today, he would swing trade and not day trade from the start.
So one way to avoid the pattern day trading rule is to not day trade! You will likely make more money as a side benefit.
So no need to use lower win rate strategies such as options or send your money off to an overseas broker that charges commissions or other fees.
If you start with trading penny stocks or options, you will develop an aversion to holding overnight. This is another reason to avoid day trading and swing trade higher priced, higher quality stocks to begin with.
Limiting Belief #7 – It Will not Work for Me and I’m Skurd! (scared)
Don’t be skurd!
🙂
Seriously, its good to be scared when getting serious about trading. Start on a simulator first and start with a small account when you go live. If you trade options or low priced stocks, you definitely want to be on a simulator for a long time.
You can give a bad trader $100,000 and they can lose it quickly with low priced stocks. You can take a very good trader and give them $5,000 and they can turn it into a $100,000 on higher quality growth stocks.
So the strategy and the execution are what matters. Not your account size. See the chart above.
Commissions are free nowadays and so is a simulator with many brokers so you want to take advantage of this golden opportunity to learn without paying for early mistakes.
But its silly to think that you can just walk into this game and feel comfortable and confident with your strategy. Make a lot of your mistakes on a simulator first and challenge yourself to grow the simulated account quickly. Correct your mistakes on a simulator so it will not cost you real money.
No, a few weeks is not long enough on a simulator. Trade your first market uptrend and first correction and bear market on a simulator while getting comfortable or test different strategies over many dozens of trades each. Put your money elsewhere in the meantime. All new traders make mistakes and you want to clean these up as quickly as possible.
If you want to just dive in with alive account, at least start with small position sizes relative to your account size.
Again, if you are trading penny stocks or options, you want to stay on a simulator for much longer. Lightning quick reflexes and analyzing every nuance of level 2 is probably required. Level 2 reading is not needed with our swing trading strategies.
Once you go live, turn off margin and you can probably put a 30% stop on the entire account after you learn great strategies like ours and be just fine once you have your execution and strategy down pat with aggressive position sizing if that is how you want to trade. Again, think ideal trades with a big catalyst and tight stop-losses.
Remember, risk management is actually critical to rapid account growth. Starting on a simulator and cleaning up early making mistakes there is a part of good risk management.
Risk management strategies are also a great way to keep your large account after the next market crash. In other words, great risk management should automatically put you mostly in cash or put options quickly during the next market crash which usually takes weeks or months to unfold.
Limiting Belief #8 – I’m Confused and Don’t Know Where to Start
In the next blog post we will go over strategies ideal for short-term swing trading and rapid account growth. We will also be looking at actual recent examples from our service that continues to improve and pick big winners after 15 years.
How to Grow a Small Account Quickly Part 1
Creating Your Own Winning Trading Plan
Our Top 2 Swing Trading Opportunities for the Weeks Ahead
