My goal with this project is to take a small account that I had long ago that I had completely forgotten about. It had a bit less than $500 in it. When trading, that isn’t just considered small…its a micro-account.
Many of you might be starting with an account that size. Nothing wrong with that, I traded with small accounts too way back in the day.
My goal will be to grow this account to $25,000.
Some people will still call that a small trading account….but heck, I wouldn’t call that small. You could have decent amount of fun spending that money. Also, that is the number that the SEC has set for the Pattern Day Trader Trader rule (PDT), so I’ll go with that.
Can that be done?
How long will that take?
Who the heck knows…but if you are curious or want learn about how I trade, feel free to follow along.
Small Trading Account: Strategy
Right now (2020), the markets are certainly volatile. Gone are the days of overall low volatility to the upside for the stock market that we have all enjoyed since 2009. The whipsaws in the stock market that now occur on a daily basis…both up and down, have become the norm.
When swing trading and entering a trade with a “perfect” pattern with the time-frame of days to about 2 weeks, you can be stopped out the very next day as your stock gets pulled down by a sea of red.
The strategy I have used reliably over this past bull market has become….less reliable.
Yes, it still works and I still trade it, but sometimes no matter how good the setup pattern might be, it can’t fend off the huge wave of selling that swamps everything and takes practically everything stock in the market down with it. It can be frustrating, because I know that the trade would likely have worked out perfectly, but instead the overall stock market washed over my trade, pulling it down with the rest of the market.
What to do?
As I said, I still make swing trades that sometimes hold for up to 10 days….but I’ve also been making trades with a shorter duration, eliminating much of the newer volatility risks that we have been experiencing over the last year.
I wrote a blog post some time ago when there was a blip of volatility in the stock market about trading with a shorter time-frame…trading stocks that can overcome the wave of red that inundates practically everything in sight.
There is a ray of light though, or shall I say GREEN. Looking at that heat map above, on that particular day, there are just a few stocks that are actually up, bucking the overall market!
Those are the stocks that I am going to be trading with my Small Trading Account Project.
Think of it this way…When the seas are rough, and the stock market is taking everything down with it, why not focus on the few stocks that are bucking the trend?
Like a ship plowing through a massive wave, doesn’t it make a bit more sense to jump onboard a stock that plows onward and upwards?
Sure, I could short stocks but remember…this is called The Small Account Project. I am trading a small account here.
Many brokerages don’t allow margin (needed to sell short) trading for such a small account balance.
Also, many aspiring traders starting with a small account aren’t seeking (and don’t understand) the nuances and certainly the risks that can come with shorting.
In addition, trading in this way a bit more often (two to three trades a week) will give you more opportunity to see how I manage (or don’t) through the process. 🙂
So let’s get into a bit of detail about how I am going to trade this very small, micro account, vs. the swing trades setups I’ve highlighted in the past.
The “old pattern” I traded for the last 9 years:
Many of you might already be familiar with the pattern that I typically trade, which I have been using throughout the past bull market.
Below is a typical chart pattern showing my entry and exit points.
This is a swing trade with an entry on a retracement of an overall up trend. You see the rather large recent move up that started in Jan 2018, it peaked and then declined to a point of relative support, where I would enter and play the bounce.
However, notice how this takes a relatively long time to play out.
- Days and weeks for the move up.
- Days and weeks for the move down.
- Days and weeks from my entry to my exit.
Remember what I just mentioned towards the start of my post? Today, compared to the past…there are newer problems:
- It is hard to find lots of patterns like this. I like to be “picky” with my trades, only selecting the best of the bunch and the trading opportunities today (2020) are drastically reduced.
- Notice how the stock is above the 200 day moving average.
- Notice how the 50 day moving average is above the 200 day moving average.
- Notice how the stock had been an a nice, overall uptrend.
- Who is to say that you make that entry and sure enough, the market tanks several days in a row, stopping you out of the trade because of a spike in Covid-19 cases, a Trump tweet, another spike in jobless claims, etc?
Bottom line: It is harder to trade the type of pattern as reliably in the past and when you do…there is a the risk that you get pulled down in a sea of red as the market pulls the rug out from under the trade!
The solution: Trade with a much shorter time-frame, with an entry and the exit on the same day, or the very next day.
The “new pattern” for the Small Account Project
In many ways, the “new pattern” I am using for the Small Account Project follows mostly the same bounce play back up from a retracement of recent highs as the prior pattern I had used so faithfully for the last 9 years…except it takes place in 1 day.
Yep! One day.
Here is a sample:
Here you can see a typical pattern (ticker DPW on 10/2/20)…this is a 15 minute chart showing the activity for one day (denoted by the dashed vertical lines on the chart).
- You can see the day started with a bang, with a huge up move (news) to start the day.
- Invariably, sellers came out of the woodwork (and probably quite a few short sellers)
- During the middle portion of the day, the stock stabilized and showed support.
- As the trading day is winding down and the close is approaching, the stock had a move back up, powering into the close. Short sellers from earlier likely closing out their positions at a profit, new buyers getting in hoping for a bounce the next morning, etc.
On this test trade, I entered right around the start of that big huge candle and sold going into the close.
I’m still making a few tweaks on my method for trading this type of account: the exact screen to find these type of chart setups, the rules on exactly when to enter, when to sell, how long to hold (keep a certain percentage of shares into After Hours trading and even into the next day, etc), but I’m almost done refining everything….and it’s been working well so far!
Give me about another few weeks and we should be ready to go. I will start posting each and every time I make a trade so you can follow along.
[UPDATE] I’ve described the “typical” pattern I will be using for the Small Account Project here.
Good luck with your trading…and stay safe!
2 thoughts on “Small Account Project – The Trading Strategy”
Hello there, I find your blog post very interesting. Basically you say that swing trading is very difficult at the moment and one should switch to (intra)day trading? How do you screen for stocks then? Just before the market open, but 5-10 of the most promising stock on a watchlist and then just watch them the whole trading session?
Thanks for the comment! I still swing trade as before, no question. But it is fair to say that over the last year or so, the market has changed quite a bit compared to the last 7-8 years of what has been a steady climb. In the U.S., the stock market has had a V-shaped recovery (don’t know if the economy has though) and volatility (sharp daily moves up and down have increased). I’m saying that it is always a good idea to keep an open mind and adapt. That’s why I’ve started to look at a few different options…also can’t hurt to diversify one’s trading methods either, right?
Also, with this small trading account, I thought it would be fun to have a more active approach (more trades per week), rather than a swing trade that lasts for days, into a week+. Not much to document and talk about there, maybe a bit boring, etc. With this approach we would be looking at about 2-3 trades a week.
As far as the way I screen and decide which trades to take, I’m going to document a “typical” trade from start to finish on my next post, along with a video on YouTube…this week.