If there’s one thing that I’ve seen over and over again in my years of trading the markets and coaching traders, it’s this: traders of small accounts rarely make them into “larger” accounts. .
I don’t care where you are in life, everyone has a small account of one sort or another. Perhaps it’s your only account. Maybe it’s just one of your accounts, but regardless of what reason you can’t aggregate it into something larger. This is pretty typical with retirement accounts, they are usually very specific and can’t be combined.
And it probably wouldn’t surprise you to learn that trading a small account has its own unique challenges, and they almost universally make trading a small account more difficult than a larger account. So if we’re going to have any success at making our small account into a mid-size or larger account, we have to identify those challenges and meet them head on with solutions.
And the principles that we’re discussing here can be used with any form of asset trading, whether it’s stocks, options, futures, crypto, or any other fungible asset.
We begin with our first challenge to trading a small account, which I’ll call Target Fixation. Target fixation is a condition observed in humans in which an individual becomes so focused on avoiding something that they actually increase their risk of hitting it. For those of you that have ever taken to two wheels, this is a very important condition to know about to stay safe. So many single-bike accidents are caused by riders drifting right into what they are trying to avoid. They focus on what they are fearing, and in doing so get locked in on that object until they hit it. And this is why riders are drilled to turn their head in the direction that they want the bike to go, which is a good metaphor for trading a small account.
You want to focus on growing the account to make it larger, and not fixating on how much more you could lose.
Look, there’s no denying it, trading a small account is like flying an airplane right above the tops of the trees.
If you dip one of your wings even a few inches, you’ll auger in.
And this is what we do with small accounts. We obsess over the fact that it’s a small account, and we focus on NOT losing money. I mean, it’s small enough as it is, you don’t want to make it any smaller, right?
And that’s precisely what we do to blow out so many small accounts.
Why we focus on being protective like this is obvious; we want to guard what we have, and move forward, not backwards. And there’s nothing wrong with that.
But this is where all of the conditioned responses that we’ve learned in life conspire to work against us.
This happens for two very specific reasons:
The first is how our subconscious mind engages the reticular activating system, or RAS, to seek information. The subconscious mind’s focus is on protection and not losing money, so it sends instructions to the RAS to gather all possible information on losing money. You can think of the RAS as the gateway for how information gets to our subconscious brain; it gets filtered based on the criteria that the subconscious brain supplies, that is aligned with your belief system.
This is how the mind works; what you focus on, expands. If you focus on not getting more in debt, you somehow get more debt. If you focus on not eating more food, you somehow gain weight. This is why lottery winners statistically end up giving back all of their money and more than that, simply because their belief system is not aligned with being a millionaire, so their subconscious mind drives all sorts of actions to rectify that situation, without the person ever realizing it.
Now, how do we fix this condition? We have to teach our minds to focus on where we want to go, not what we want to avoid! We have to start with who and what we believe in, and what we want to achieve. Focus on where you want to go, not what you want to avoid. This is a very subtle yet powerful difference that can start to change your life in all sorts of ways once you understand it.
The second condition that we run into when trading a small account, and this is related to the earlier point of not losing money, is that we want to trade so that we don’t lose money. This is especially apparent in professionals that have made a living up to this point through logical careers like engineering or some other science profession. Through cause and effect, there must be some “magic” trading strategy that wins nearly every time and hardly loses. This is where the trader, in conjunction with the aforementioned concern about losing capital, seeks trading strategies that minimize the chance of losing, instead of focusing on the chance of winning.
That is to say that they play not to lose, instead of playing to win.
You’ve seen it before in sports, a team will get up big in the scoring column and then sit back and play “prevent defense” while the team that’s behind is still fighting like mad. It’s agony to watch these games because you can feel the momentum shift while the team that was up big, starts to play scared. And you’ve seen many games like this that eventually went in the favor of the underdog. Trading not to lose is one of the most dangerous things that you can do in trading because invariably, you’ll trade along with the herd. You’ll wait until things feel just right, which is to say that you’ll wait until all of the perceived risk is out of the setup before you pull the trigger. Haven’t you felt at one point or another during your trading career, telling others, “just wait until I enter and then take the other side?” Trading Not to Lose almost guarantees that you will lose.
Warren Buffett was right when he said, Rule Number One, Don’t Lose Money. But he didn’t tell you how to NOT lose money. I’m sharing with you right now the top two reasons why small account holders make their small accounts into micro-accounts.
The first is target fixation and focusing on the ground instead of where you want the account to go.
The second is trading not to lose, instead of trading to win.
You might not completely understand those two points just yet. I’ve tried to analogize them so that you can identify them with situations in your every-day life, and start to apply them to trading. But blow them off at your own peril, because every experienced trader that I’ve ever met agrees with me that the mental side of trading is easily 90% of the challenge.
Perhaps you’re different, though….maybe you do understand those two points very well, and you’re raring to go. From this moment forward you’re going to focus on the sky instead of the ground, and you’re going to trade to win. That’s great, but there are a few more skills that you’ll need to survive with a small account.
Watch for my upcoming Livestream entitled, “Trading a Small Account: Ten Steps to Make Your Small Account Bigger.”
Doc Severson, Westerville, Ohio