At some point, you may feel ready to start trading with real money. But how should you start?
If you are beginning with under $25,000, then the same principles apply as for a larger account. However, there are some differences for a smaller account. If you are starting with a very small account (under $5,000) then the rules are especially strict, as you cannot afford to lose any capital.
- Ask your broker for some free trades. Commissions will eat up your profit otherwise. Currently Schwab is offering 500 free trades for a new account sign-up. TDA is offering free trades for 60 days. Whether you prefer TDAmeritrade or other brokerage, ask them to match! It its usually better to get free a number of trades rather than a time limit. E.g. "30 free trades". Reason? You are a new, cautious trader, and the time will run out very quickly, before you've used many free trades.. However, if you are a more experienced trader, figure out how many trades you do (e.g. one per week) and choose the best deal for you.
- Start with only very low-risk trades and trades with 90% probability of success. These would include credit spreads: Bull Put Spreads, Bear Calls Spreads, and Iron Condors. Put time on your side by selling credits rather than buying spreads. Long Puts and Calls should only be used short-term.
- One trade at a time. Add a new trade when the first is successful. Manage each position until it closes with good profit before adding others. You want to build success on success.
- Use only 1 or 2 contracts for each position, risking only a little on each trade. Do not close your positions until you have significant profit.
- Keep in mind the "day trade" rule. Accounts under $25,000 cannot trade more than 3 turn-arounds (buy & sell) in five days. See your brokerage agreement.
- Consider using commission-free ETFs for some trades. Ask your broker for a list or add them to your Scan.
- Maintain a track of your commissions. Some multi-legged spreads such as Butterflies can eat up more commission than the actual cost of the trade. It costs money to close as well as open a trade, so typically you'll spend about $20 total to open and close just one contract.
- Remember that real money trading and paper trading are not always the same. PaperMoney trades are based on price alone (splitting the bid/ask) but in a live account, you have both price (not necessarily mid-point) and availability (there may be nobody on the other side of the trade) to consider. Orders for 10 contracts may be only partly filled. You need to decide whether to keep the order or cancel the remainder, or call your broker for a manual fill.
- Keep trading your PaperMoney account every day, even after you trade in your cash account. You should spend more time practicing than trading, no matter how small your starting account.
- Don't trade alone! Get feedback and ideas on your trade from a mentor or other traders. Join HOT Options chat on Facebook and join the daily conversation. Go to https://www.facebook.com/honoluluoptionstraders/ and LIKE the site, then make a request to join in the Comments. An Admin will add you. Then look for the "HOT Options" in your groups, and introduce yourself to everyone. You are in!
- Keep educating yourself with new ideas and strategies. The CBOE and OIC have occasional webinars on this topic, and sites like Tasty Trade have a library of Youtube videos on many topics. Your thinkorswim platform also has free recorded videos on many introductory and advanced. topics. As you knowledge grows, you will become better and better as a trader.
Welcome to thousands of small traders around the world!