Active-Trader - Small Account Syndrome

Welcome back, Active Traders.

You may have heard of Small Town Syndrome, or Small Dog Syndrome or even Small Penis Syndrome.  Well today I am a going to introduce a term into the financial lexicon called Small Account Syndrome.

I would define Small Account Syndrome as an acute difficulty in growing a small account, even when you don't have similar problems growing large accounts.   And I am a walking, talking example of Small Account Syndrome because I'm having a decent (although not stellar) year in my large accounts returning in the 11-12% range.  Meanwhile, my small TradeStation account seems to struggle along and is up just a measly 2% for the year.

Now granted I'm not that great of a trader.  But I'm also not full-time and I try to trade along side my other responsibilities including a house, family and a full-time job.  If I were a full-time trader, I would expect a much higher rate of return commensurate with a full-time effort.   But that said, I've noticed some key psychology affects around small account that constrain their growth.

Before we get into that, let's me say that I have blown up a few accounts in my day.  I blew up a Forex account with FXCM prior to 2010, another Forex Account managed by Zulutrade documented here.  Also, I blew up several smaller Forex accounts documented right here on this blog.  Also, I blew up an Options Express Account a few years back.  All blow-ups did not results in a complete loss of funds, but loss of enough funds to realize it just wasn't working and that it was time to throw in the towel and close the account before doing any further damage.

So suffice it to say I have experience blowing up accounts to be an authority on the subject - and they are always small accounts. Since they are small means that I have never been wiped out so much to be knocked out of the game.  After all, survival is the key to successful investing - in other words stick around long enough to learn from your mistakes and you will eventually get it right!

Here are the key factors working against small accounts:

Need to be Right

As John Carter as pointed out, we are trained from a young age to strive for perfection.  In other words, be on time, pay attention in class, get good grades in school, get a good job etc.  I can relate to all of the above since I try my best in nearly everything - all the way down to separating my recycled items from regular trash and rinsing out the container.

And nowhere is the pressure greater to get it right than with a small account - particularly with that first trade. Its your inner teacher looking down on you and waving their finger and saying "don't screw it up!"

Watch the Basket

There are 2 philosophies of trading:

1) Don't put all your eggs in one basket and
2) Put all your eggs in one basket - and watch the basket.

With a small account, you can't put on too many trades.  This is even more of an issue with option spreads where your max profit exceeds your max loss.  For my typical spread which is $5 wide, I am making $170 and risking $330.   If I put on 5 of those, and 3 of 5 go bad, you are now down $650 on a 10K account or 6.5% which is not so easy to recover from.  Thus there is even more pressure to get it right.

And it all came to a head this past week in my Think or Swim account, newly funded with 10K and ready to trade. So here's what happened:

TSLA - 150/155 - 195/200 Iron Condor

This trade was put on Tuesday 11/5 just before the close.  Tesla stock was at 175 and the expected move was about $20. So I sold the 195/200 Call Credit Spread for a credit of $1 and the 150/155 Put Credit Spread for a credit of 0.85.  So I took in a credit of $185 for a max possible loss of $315.

I watched nervously after hours as the stock traded and it immediately came down just above my short strike at about 158 and bounced around until the end of the after hours session and came to a rest at about $155. The next morning it opened closer to $159 and I breathed a sigh of relief.   But that was short lived and the stock soon dropped through my short strike - and in no time at all was fully in the money against me at $150.

Later that day, its a relief rally and got up to as high as $154.45 and my hopes were renewed.  But that didn't last either and the stock rolled back over and headed south.  The next day it gapped down and trade as low as 140, then had a brief rally.  I knew this trade was toast and that the TSLA balloon had popped.  So I closed the 150/155 PCS for a debit of $470.

So here I was, on my very first trade in my new Think or Swim account, I lost $285 or about 2.8% of the account on my first trade!   This was not good news since my experience with accounts (and investments generally) is the best ones are winners right from the start and the ones that lose go into the hole soon after entry.

Well I had to redeem myself and was not going to let this account be a failure, particularly after all my years of trading and investing.   Here's what happened next.

PCLN 190/195 Call Credit Spread

This trade was put on prior to earnings on Thursday afternoon.  The stock had a large sell-off that day, trading from $1045 all the way down to about $1022 at the close.  The expected move was an incredible $60 so I added that to 1030 and came up with the 1090 strike.

I knew I had to go big or go home on this trade, I put in an order to sell 4 of the 190/195 Call Credit spreads at 1.10.  If the trade worked, it would net me $440 and more than make up for the loss on TSLA. I put in the order and waited and just prior to the close, I got filled on 3 of my 4 contracts and cancelled the remaining contracts.

This trade clearly exceeded by risk parameters - risking $4 to make $1.10 and doing it 3 times over.  I watched nervously for the action to unfold just after 4PM EST.

The after hours action in PCLN was insane, trading initially down to about $1000 then as low as $945 then as the news came out higher and up to as high as about $1070.   It closed the after hours session in the middle of the range at about $1039.

Friday brought more anxiety as the stock moved around trading as low as $1019, then started moving steadily higher.  In no time at all it was $1060 then trade as high as $1075 and I started to get nervous.  I watched prices for the spread fluctuate between 0.20, and 0.60 and I sat on my hands and resisted the urge to take a profit.  I learned from trading spreads that you have to stay cool and give them every chance to expire at max profit.  I watched PCLN very closely for most of the day Friday and finally started to relax around noon time.   The highest the stock could get was about $1077 and I let it expire worthless for max profit.

Bottom line after all that is, I made up my entire loss in TSLA and put the account up $45.  And I rescued the account from a losing week and put it into the positive which was an important psychological victory.  Also, I learned that its okay to have an opinion on earnings trade - you can put on just one side and you don't always have to put on a Condor.

I also had a few decent trades in my TradeStation account like the stock and options play in CMG shown above.

So for this week anyway, I snatched a small victory from the jaws of defeat.

Have a great weekend and get some rest.