In the world of retail traders small accounts are the norm not the exception. With new traders this is doubly true. Traders can open a trading account with as little as $2,000 and once opened some brokers allow accounts that dip below $1,000 to still trade.
Yet, much of the trading literature out there puts forth trading rules based upon the assumption that traders will be trading accounts with at least $10,000.
So lets talk about trading futures with a micro account.
What Constitutes a Micro Account
I define a micro account as a trading account where $100 is greater than 1% of the account value. That means any account under $10,000 is a micro account.
I use $100 as greater than 1% of the account value as the demarcation between what I consider an underfunded or micro account and a minimum full size account because common trading wisdom dictates that a trader never risk more than 1% of the account value on any single trade and I use the assumption that the average stop on any given trade will be approximately $100.
Using the assumption that a trader is using a $100 stop loss, then the minimum account size that would allow a trader to honor the 1% risk rule would be $10,000.
If you are reading this article then chances are you are trading an account that is significantly smaller than $10,000. You might be trading an account half that size or a quarter of the size or even less. That means either your average stop loss is $50, $25 or less or you are risking 2% or 4% or more of the value of your account on each trade.
Either way you are stuck between the proverbial rock and a hard place, either trading with a tiny stop loss or risking double or quadruple or more of the recommended pertentage of your account on each trade.
Fortunately, all is not lost, let’s talk about things you can do as a micro account trader.
Alternatives to Trading your Micro Account
- Don’t Trade live
My first piece of advice about trading a micro account is DON’T trade. I know that seems weird in an article about how to trade a small account, but it is actually the best decision.
In a perfect world I would recommend that instead of live trading you save money or work an extra job until you are able bring your account up to at least $10,000. During this time you would study and trade SIM, honing your trading skills. That would be the prudent path but knowing most traders will not follow this advice there are a couple of other things I recommend.
- Take a Trading Combine
The next best option if you are determined to risk real money is to spare your account and instead enter a trading combine. In case you are not familiar with the concept a trading combine is where you pay a fee to trade a SIM account for a trading firm. There are rules such as not losing more than a set amount of money per day and per week and a profit target you must reach to pass.
Upon passing the combine the trading firm funds a live account for you and you get to keep a percentage of the winnings without being personally responsible for the losses. Combines generally cost $250 or less (less than 3 losing trades) and there is real benefit to being held accountable by a 3rd party.
Combines are a great way to stretch your money when your funds are limited. If you have a profitable strategy you can gain a funded account and then either primarily trade that account or take your winning and fund your own trading account. Either way you win.
Conversely, if you fail the combine, then it probably means you would have blown your real account as well, so better a few hundred dollars stretched over several weeks than potentially blowing up your tiny account in a single trading day.
Trading Against a Stacked Deck
You can succeed trading a micro account, but just be aware that the deck is stacked against you.
Micro accounts have a very small margin of error. Losing trades and even losing streaks are an unavoidable part of trading. They happen to eve the best traders. That’s why so many in the industry advocate for the 1% rule. This 1% rule allows you and your account to survive the losing streaks.
When you are trading a micro account, especially when $100 equal 4%, 5% or more of your trading capital a losing streak can be catastrophic to your trading account.
A catastrophic loss is any loss equal or greater than 20% of your account. When you are risking 1%, it would take 20 losing trades to lose 20% of your account. Hopefully, you would stop trading before then and reassess your strategy. However, with a micro account 4 losing trades might equal 20% of your account.
The Emotional Cost of Trading a Micro Account
Trading by its nature has an emotional and psychological component. Traders ignore this at their peril. Trading a micro account magnifies the emotions mainly because the risks are magnified. When you know you are 3, 4 or 5 trades from losing 20% of your account or hitting a margin call from your broker this affects your trading. You can become fearful of pulling the trigger, exiting trades on the smallest pullback, taking profit too early or conversely, becoming reckless and refusing to close losers or take profit where appropriate.
Now you have heard all my warnings and alternatives, but you are still insistent on trading with a micro account. Lets talk about how to make the best of a tough situation.
Micro Futures Contracts – a Game Changer
A couple years ago I would have said trading futures with a micro account was an exercise in futility, but these days the odds are much better that you can successfully trade futures with a micro account.
The biggest change is the introduction of micro future contracts, with micro contracts the math suddenly does not look so bad for micro account traders. Micro futures are future contracts that have 1/10 of the value of the mini future contract.
Good examples of this are the micro index contracts. The S&P or the ES as it is called is the most commonly traded futures contract by retail traders. The Mini ES futures contract has a tick value of $12.50 per ticks, which mean that an eight tick stop equaled $100. The Micro ES futures contract has a tick value of $1.25 per tick. This means a trader can trade using the same size stop but risk $10 instead of $100.
Additionally, many more trading strategies become feasible for the micro account trader. A trader can now trade multiple contracts and take partial profits. Or a trader can trade on a much larger time frame or use a much larger stop.
The only draw back with micro futures contracts is that the commissions are a much larger relative to the tick size. Whereas a mini futures contract will generally have a round-trip all-inclusive cost that is less than 1 tick, the all in round trip cost of a micro futures trade will generally be somewhere between 3 and 5 ticks. This has a real impact on your trading statics and P/L.
However, all in all using micros is a great tool for the micro account trader.
Advice for trading a Micro Account -Learn to Scale
If history is any indication most traders will ignore the above advice and insist on trading their micro account. Given this truth here is what I recommend to increase your chances of successfully trading a micro account
One of the most important things a micro account trader can do is learn to scale. How this works is each day you start with a very small maximum loss limit. Lets’ use $150 for our example. $150 trading the mini ES basically gives you one and a half losers before you are done for the day, that’s not a recipe for success.
Instead, start by trading the micro ES and if you have a couple of winners add size until you are positive $200 or more. Now you can switch from the micro to the mini ES. When done correctly this strategy allows you to have mini ES sized winning days but keep your losing days micro ES sized.
This is important so let’s look at that this in further detail. By sticking to the micro ES to start each day until you have some profit you contain your losses to micro sized.
Imagine that on Monday you might take 5 trades on the micro ES, but for whatever reason you are out of sync with the market. You stop trading for the day without ever having taken a trade on the mini ES and you end up with $120 in losses for the day.
On Tuesday, you again start trading on the Micro ES, but today you catch a strong trend and take several consecutive winners. You add size after each winner and after the 4th straight winner when you are up $265 you switch from the micro ES to the mini ES. The trend continues and you have several more winners, but this time they are mini ES winners not micro ES winners. You end the day up $1350.
Wednesday starts off with a bang and after 3 winners in the micro ES you are up $200 and eagerly switch to the mini ES. Today looks like a continuation of yesterday. Alas, the strong move ends and you loss two trades on failed continuation trades. You are around breakeven for the day and wisely decide to call it quits with a P/L of -$12.
Thursday is a choppy and sleepy day in the market and you alternate winners and losers. You never make enough to switch over to the mini ES and decide to shut it down once you realize the market is a choppy mess. You end the day with $32 in profits.
Friday picks up right where Thursday left off, sleepy and choppy. You get caught in a couple of failed breakouts and end up losing your full $150.
Two maximum losing days, two breakeven days and only a single winning day. you wouldn’t think this was a great week of trading. However, you end the week +$1,100! For an account under $10,000 that’s at least a 10% account growth! Even if your winning day was half this size, you would still experience incredible account growth.
More importantly, this is not an unrealistic scenario. Its very possible to have an oversized winning day with a small account. Most micro account traders have had trading days like this. The problem is that most micro account traders have equally oversized losing days.
The key is to use the micro futures to eliminate the oversized losing days and maximize the winning days. Do not stop trading when you are on a roll. This takes both discipline and courage, but it can be done.
Trading is hard and trading a micro account is even harder. I hope I have persuaded you to refrain from trading your account or to pursue alternatives to trading your account until your account is adequately funded. But, in the case that you decide to press forward I hope I have given you a strategy that will allow you to succeed with even the smallest account.