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Your account size will determine the type of trading you do.
Your trading account should contain risk capital. Risk capital is money that you will not immediately need for an upcoming known expense such as rent.
If you are trading a small account (let's say $10,000), you can trade and learn, but you should be placing small bets.
One of the basic rules to trading is to not lose your capital. When you have a small online stock trading account, commission charges will eat you alive if you are trading too often or paying too much in commission. You can go broke in no time at all if you do not pay attention to basic money management principles.
Also, if you follow a general rule stating you should not risk more than 2% of your capital, the most you should be planning on losing per trade would be $200. This tends to restrict the price of the stock that you can buy.
According to William O'Neil, in "The Successful Investor" the most you should lose on one stock is about 7%.
When the 2% and 7% rules are put together, if you are buying 100 shares for a $10,000 account then the maximum priced stock you should buy is 200/(0.07 x 100) minus commission and slippage or about $28.
A round lot is considered to be multiples of 100. Therefore, buying 100 shares is easy, but buying 50 shares is a bit harder. It will either cost you a bit more to buy or sell if you place a market order or will take you slightly longer to buy or sell if you place a limit order.
You can increase the price of the stock you buy in three ways:
Another problem which occurs when your online stock trading account size is small is that if you have one unexpected large loss you are potentially in trouble.
For example, you pick up 200 shares of a $20 stock with a tight stop. Unfortunately, bad earnings are declared and the stock opens the next day down $7. You are now down (7 x 200) $1400 or 14%. In order to make this up, you would be required to have the remaining $8,600 gain 16.28%. On a $100,000 account you would only have to make a return of 1.42% on the remaining $98,600.
For more information on account size you may want read our book reviews.
You can trade small accounts, just be aware that you need to be extra careful.
Monte Carlo Simulator
for Traders Having troubles sticking with your trading system?
Do you move from system to system looking for the one system that will bring you riches?
Perhaps you already have it and tossed it aside when it went into a down period.
Using this Excel based program will show you what you can expect out of your trading system once you know the % wins and profit factor.
Stop wasting your time searching for the perfect system (which does not exist) and start trading.