You do not need to have a big trading account to become a successful trader. In fact, the amount you are trading has little to do with your success as a trader. In many cases, having a big trading account as a beginner can be a detriment to your long-term success. The best way to explain why starting your trading journey with a big account is not a good idea is to look at similar scenarios in the business world.
Why you should always start a business with limited capital
A famous entrepreneur who stars on America’s hit TV show Shark Tankadvises contestants who appear on the show to start small. The main reason to start a business with minimal funds is that it forces you to be creative and find ways to work with limited resources. Most people who start businesses with millions end up closing the business when they run out of money because they did not focus on ways to create revenue. As a professional retail trader, you should always treat your trading as a business, which helps you follow the rules of trading.
A big trading account will hide your mistakes
The biggest challenge with trading a large account as a beginning trader is the fact that it magnifies your trading mistakes. For example, a 1% loss on a $100 account is just $1, while the same loss on a $100,000 account is $1,000. While a $1 loss does not seem like much compared to the $1,000 loss, the trader with the $100 account is likely to have a bigger feeling of loss than the one with the $100,000 account. Therefore, the trader with the smaller account will work harder to ensure they do not keep losing as they will blow up their account. On the other hand, a $1,000 loss on a $100,000 account leaves the trader with $99,000, which is a decent amount of money and may not inspire the trader to try harder.
What do banks and hedge funds do?
Keep in mind that trading started in banks and that they have been doing this for a long time, which means that we should pay attention to their methods. Most banks, hedge fund and proprietary trading firms will give beginner traders a small account to trade. Once such traders have proven that they can consistently trade the tiny accounts, they are then allowed to trade much larger accounts. There is a reason every trader recruited by such institutions has to follow these steps. Not only is it a good way to manage risk for the bank, but it is also the best way to learn to trade.
What is the ideal account size for a beginner trader?
There is no single figure that works for all traders as each person’s financial situation is different. However, you should not trade with funds that are needed for other living expenses, such as rent or groceries. You should only trade with an amount that you are comfortable losing, which could be $100 for one trader and $1,000 or more for another trader. The key to determining the right amount to set aside for trading is to trade with extra funds which will not affect your standard of living if they are lost. Do not forget that trading is a long-term commitment; you can always allocate more funds to your trading over time.
Discipline is the key to your success in trading
Most beginning traders tend to focus more on the profits they can reap from the markets than learning how to trade and manage their emotions. You are likely to make losses at the start of your trading journey, and having a small account will make you focus on the trading process instead of profits. Blowing a large trading account could make you give up on trading for good, and you’ll miss out on one of the most exciting ways to make money.
The bottom line
The truth is that starting with a big trading account is not good for most traders because there is a lot that could go wrong with a large account. A small account is better as it gives you more room to make mistakes and learn from them without losing a lot of money. You should start trading with a small account and then only add funds after you have become a consistently profitable trader.