8 More Tips for Growing a Smaller Account
Last week we talked about some of the common obstacles traders new to a strategy need to overcome. This week we will go over some more tips for growing a small account quickly in 2024 and beyond.
Tip #1 – Increasing Confidence
To grow a small account quickly you will need to have the confidence to grow a small account quickly to begin with.
The best way to increase confidence is to back-test 100s of examples of the type of trading opportunity you will be looking for. Look for examples in both bull market, corrections and also bear market conditions.
You can also check with other traders in their writings to know where to look for a great swing trading strategy. Another great way to find one is go back through any historical trades you have and identify the ones that worked best, why and under what market conditions was it more successful.
A new strategy you are researching or being taught can be first practiced on a free simulator. This is a great way to build your confidence and get a sense of the win/loss rate and good targets and stop-loss to use.
This is the best place to start for new ambitious traders.
So research and practicing on a simulator will develop a lot more confidence in the strategy you plan to use.
Tip #2 – Realize Most Great Traders are Usually Drawing Down
Many of the best traders of all time are in a drawdown 80% of the time. They just do not get aggressive when they are drawing down. This makes a big difference.
They tend to have equity curves that look flat or trending lower for weeks, months or more but then double or more quickly. We showed an example of this in the last blog post.
So patience is a big key when trying to turn a small account into a very large account quickly. Its important to trade the very best stocks in the most bullish technical patterns as well. The highest win rate trades should give you smaller drawdowns versus trading everything that you come across. In most markets, less is more.
Over trading will definitely increase your drawdowns in most markets and delay reaching your final goals. So its important to know what the highest percentage technical setups are and focus on those.
If you feel like you missed the last trade and want to make up for it, you can always buy the SPY, QQQ or IWM and ride the market higher if its moving higher. If there is not an ideal opportunity with a big catalyst, this is usually the better bet until an ideal trading opportunity comes up on your radar and reaches a good technical entry point with a big catalyst.
Tip #3 – Expect Drawdowns Beforehand
One of the worst things we can do is to have a great trading opportunity hit our stop and then shy away from the next one.
You should have an idea of what the win rate is for your strategy through careful research ahead of time. I prefer strategies that do not come up every day and come up less in corrections and bear markets such as the ideal high tight flag breakout which has a high win rate.
Few stocks will form this pattern and fewer will meet all the rules in our high tight flag strategy the morning before the breakout. So this keeps us from over trading just by using this strategy. The earnings eruptions strategy for the best earnings gaps is also good to use and worked out great for TMDX, BLBD and PI this earnings season. Notice all of these stocks were just below all-time highs before the big earnings gap and terrific news.
High tight flag breakouts are rare in bear markets and during market corrections where we want to spend more time in cash anyways. Perhaps a short or put option set up will perform better during the bear market or correction such as a parabolic short on a stock that was just pumped to irrational levels like AMC and GME last week.
Tip #4 – Always be Prepared
Last quarter one of the best trading opportunities came up quickly on Fed day. Normally, great opportunities do not come up just before the Fed decision on rates so if you take the day off you would have missed POWL exploding out of a great technical pattern.
Its easy to justify not being prepared that morning but its better to take a look first at your watch list and ensure there are no big news items for the stocks on your list. If there are, you may want to be prepared with your position size, entry point, stop and target on the trade. You can then have your broker send you a text message if it reaches the entry point and then enter the trade.
Many days you can check your watch list and see nothing pre-market that fits your criteria. If that is the case, then its a good day to do other things. Forcing trades (trading less than ideal opportunities) is a good way to go backwards in your journey.
Tip #5 – Risk First Trading
You need to know the risk you are taking with each trade. You need to be more aggressive when trying to build a small account quickly so you definitely cannot let losses run.
So the first step in our trading is knowing the maximum account risk per trade and making sure the position size reflects this. A 2.5% to 4% trading account risk per trade is high and so we want a high win rate and know exactly the position size to meet the risk parameter given the ideal stop in the technical pattern we are trading.
The risk per trade has a lot to do with the win rate of the strategy you are using. From careful back-testing over 100s of trades, we should know the win rate. The higher the win rate, the higher the account risk per trade can be.
Once we know the risk, we can just do the math to figure out position size and the amount of shares to buy for the trade. If we start taking 8% account risk on 1 trade and 2% account risk on another trade of the same type then we can run into problems. The more varying factors we add to our strategy, the greater the risk of failing to grow the account.
Tip #6 – Focus More on the Hottest Industries and Current Market Themes
Right now infrastructure stocks and AI-related stocks are very strong industries in the market. Not coincidentally, 3 of the biggest trades this year in the service this year were NVDA, POWL and SMCI.
Often there are other stocks that are related to hot industries but not directly a part of the industry. Right now, certain stocks like VRT and STRL are offering a lot of winning trades because they help build the datacenters and infrastructure for AI. Even utilities are AI-related since AI increases the use of electricity.
Other industries can fly under the radar unless we look for all the top industries. Many missed the insurance bull market. Fortunately, we found stocks like KNSL for subscribers more than a year ago that offered multiple good channeling stock entry points.
Tip #7 – Avoid Low Win Rate Areas of the Market When Going Long
Stocks that have been trading less than 4 years, stocks under $20, stocks in multi-year downtrends and commodity-related stocks all have lower win rates with many of our best strategies in our experience and back-testing.
The optimal position size for rapid account growth actually goes down a lot when the win rate drops. If you look at the Kelly Formula, you can see how the optimal position size really falls as the chance of success decreases with the same risk/reward.
The kelly formula may not be the best way to size your trades but the formula gives us a good idea about how the optimum position size goes down when you take on lower win rate trades.
For instance, if the win rate is around 80% with a 2/1 reward to risk ratio, the kelly formula gives an optimum position size for account growth of 70% of the our trading account. If the win rate drops to 50%, the position size falls to 25%.
Right now, the win rate for high tight flags that do NOT meet the criteria in our optimized high tight flag strategy is probably less than 50%. The latest back-test for 2023 showed fewer high tight flags but a win rate close to 80% with a near 2/1 reward to risk ratio when looking just at the stocks that met the course rules before the market opened on the day of the breakout and entry trigger.
The prior back test showed an even higher win rate for optimal high tight flag trades.
Remember, our high tight flag strategy and earnings gap strategy have a market environment filter so we do not use the strategy much when market conditions are poor.
So not only do you have a higher chance of a loss, the account growth will be far less with lower quality trading setups and stocks that have consistently produced a lower win rate over time. Second tier opportunities can be a waste of time (and money when adding in trading error) and that matches our own experience over the years.
Tip #8 – Review Your Trades on an Ongoing Basis
All traders are going to make mistakes over time. Even very experienced ones still make trading errors.
The important thing to do is to limit those errors over time. Great traders focus on what they do well, amplify it, and stop out losing trades quickly. They are great at managing their time and analyzing their strengths and weaknesses.
They find tendencies in their own execution that other traders may miss and get to work to maximizing the good while getting rid of the mistakes. As with many things, the pot of gold can be in your own data in both your positive tendencies and the ones that are holding you back.
Like any other occupation, great traders make fewer mistakes with their overall approach to trading and daily habits which gets them to their major milestones more quickly.
How to Grow a Small Account Quickly Part 1
What We Look for in a Great Swing Trade
Our Top 2 Swing Trading Opportunities for the Weeks Ahead
