I am proud to have one of my top subscribers KZ share some amazing insights on growing out a trading account under the $25,000 PDT. He started down nearly $3,000 and is now up $20,000 in profits and his trades are shown here. He is one of the hardest working people within my community and I am glad to have him apart of my team educating others in the Investors Corner community. We’ve been doing outstanding as a group and can be seen here. Please enjoy and take notes on these 5 tips for people trading with an account under $25,000!
Most new investors enter the market with a small account. This may be due to financial circumstances or because they don’t want to risk too much to begin with while they learn. As a result, most novice investors start with an account under $25,000, often closer to the $5000. This is exactly where I started as well. When I started trading, I was down $3000 at the end of the first month. Slowly but surely, I turned it around and now am sitting on $20,000 in trading profits. Through this process, I have learned a few important insights that all traders with accounts under $25,000 should know. I hope these tips help novice traders grow their $5000 account to above $25,000 and beyond.
1) Avoid daytrading. The single biggest hassle (or blessing?) of having a margin account under $25,000 is a rule known as the Pattern Day Trader (PDT) rule. The PDT rule states that if your margin account is under $25,000, you are restricted to only making 3 day trades in a rolling five day period. To better explain this rule, imagine that you have three tickets. If you buy a stock and sell it in the same trading day, you use up one of your tickets. You will get that ticket back after 5 days. If you use up all 3 of your tickets, your account will be locked and you will be restricted to only selling orders. Therefore, day-trading is not a sustainable strategy if your account is under $25K. At most, you would be able to make 3 day trades every week. To get around this rule, the solution is to hold a stock at least overnight. Therefore, a novice trader should adopt a “swing” strategy where you hold the stock for at least one night. Focus more on multi-day swings rather than intraday spikes.
2) Fight commissions by using more of your account on fewer holdings. Most brokers in the US charge from $7 to $10 per trade. Let’s say that you have a small account and you purchase $1000 worth of stock. The cost of purchasing the stock ($10) and selling the stock (another $10) means that you spend $20 on commissions. Therefore, your trade needs to make at least 2% before you break even. For this reason, I think the absolute smallest position size you should make is $2500 so that you can minimize commission to under 1%. If you have a $5000 account, you should hold two stocks max with $2500 in each. Even better would be using all $5000 in that one stock. Sure, it’s higher risk, but the reality is that commissions will eat away a significant portion of your profits if you don’t take larger size.
3) If you must trade with under $5K, check out Robinhood. This is a new smartphone app that allows you to make trades commission free. This is HUGE if you have under $5000 and really want to try trading. You can take much smaller positions like $400-$800 without having to pay $10 to buy and sell. Wow, why doesn’t everyone use this to trade? The sacrifice you make is that this platform is only for your smartphone. More importantly, as of now, Robinhood does not allow you to place stop loss orders. This means that if a stock happens to crash, you will not be able to use a stop loss to protect yourself. This bring me to my next tip:
4) For novice traders, always use a stop loss order. Before you enter a trade, you need to figure out exactly how much money you are willing to risk to lose and calculate how much of a drop in stock price that is. Always have a stop loss order in and respect this order. The moment you decide to lower the stop loss order to avoid it being triggered, you have failed your strategy. If your stop loss hit, the reason is because you chose the wrong stock to enter and you chose the wrong time to enter the stock. Respect your stop loss orders. That said, if you still want to trade and don’t have more than $5K, check out Robinhood.
5) Lastly, NEVER add down. A trap that a lot of novice traders (including myself) fall into when starting to trade is the following: Say you buy a stock at $10 and it falls down to $9.60. Rather than taking the 4% loss and stopping the trade, you think to yourself: “Oh, this stock will rebound, so I’m going to buy some more and bring my average price down to say… $9.70. That way, when it goes back to $10, I will make even more money!” This is a trap and is absolutely the wrong way to mentally handle a losing trade. The last thing you want to do when a stock is sliding down is to add more money. For all you know, the stock can slide down to $9… then $8… and if you keep adding more and more money, your account will disappear before you mentally accept that the stock is not going to recover.
I absolutely love seeing KZ grow from a subscriber to a moderator in the Investors Corner community and turn into an awesome trader, and teacher. He loves helping new subscribers get educated and hit the ground running despite their account sizes. I want more and more people with small accounts get into trading and learning from my group that has profited $90,000 in the past 30 days. Use IGPP33 at checkout for 35% off your first months subscription until Wednesday only!