You may have many reasons for wanting to take control of your investments and be your own trader. Maybe you have had some success picking stocks, maybe you’ve had some catastrophes and want to turn it around, perhaps you would feel like you can supplement your current income, invest for retirement, or even trade as a career. There are many reasons why you should become actively involved in investment markets. There are also a number of reasons why you should stay away. It is important that you recognize that you need to have an idea about what is happening with your money and why. Even if you only have a 401k or other retirement account, you have money at risk. Do not let anyone tell you otherwise. It is important to understand the how and how much of this risk. It is almost never zero.
Consider this a brief overview. This will serve as a primer that should get you thinking about what you need to do and how to prioritize your efforts to be able to start actively managing your investments and begin trading on your own, or not.
- HOW MUCH MONEY DO YOU NEED?
While this seems like a very simple question, it is the most one to address. You should only invest or trade an amount of money you are capable and WILLING TO LOSE ENTIRELY. While it is obvious that you will do everything you can to preserve your capital, things can and will happen unexpectedly. Even if you knew tomorrow’s closing stock price today you could still lose money. You could encounter a set of unforeseen circumstances in the market and lose it all in a flash. Remember the flash crash of 2010? The Dow Jones Industrial Average swung from high to low 1,010.14 points. This range of movement usually occurs in about three months of trading of the Dow Jones Industrial Average. Take a second to think about that. You could lose at least three months of work in a single day. If you use leverage such as options and or futures and were on the wrong side of the market you could have been wiped out. The market is very humbling and you could find yourself on the floor like a roach with a huge foot above you closing in. This could happen from a rare occurrence like the flash crash or even a mistake by you. Everyone makes mistakes. Every big trader on Wall Street has a lost at least million dollars at least once in their careers, or they have lied about it. This brings us to the next point…
- I CAN BE SUCCESSFUL JUST LIKE….
The market is humbling, humbling, humbling. One of the best quotes that applies to trading comes from the great boxer Mike Tyson: “EVERYONE HAS A PLAN UNTIL THEY GET PUNCHED IN THE FACE” The market will tell Einstein that E=mc3 even though the equation is E=mc2. The only difference is that you will go bankrupt before the market returns to the opinion, which you know is right, that E=mc2. Even if you think you are right and you have some sort of inside information and are acting illegally (which Positive Sum Trading does not condone or support in any way), you could be wiped out. LEAVE YOUR EGO AT THE DOOR. Be flexible. It is OK to be wrong and admit it. If you were never wrong or were always acted with the mind set that you cannot be wrong you are unwise and missing out on part of the excitement of being an active trader. If you learn to contain to mistakes you will be ahead of the game and your mistakes will be tools to build on instead of creating crippling circumstances.
- HOW MUCH TIME WILL I SPEND?
There is a very simple answer to this. NOT ENOUGH. Active investment encompasses a wide variety of disciplines and subject matters. You will need to become a jack of all trades. This will involve topics such as fundamental research, technical analysis, record keeping, technology, and organizational skills. This will seem overwhelming at first. Once you achieve familiarity of how you like to invest and what you need to do to feel comfortable with your process you will find it manageable. It is important to remember that you are risking your money and that in itself deserves a lot of time and attention. Success doesn’t come for free.
- WHERE DO I BEGIN?
This depends on what you already know about markets, finance and trading. More importantly it also depends on what you don’t know. The top down approach to this is to research, research, research. Read financial blogs, websites, and news outlets. See what you can follow and what confuses you. If you can follow the markets and understand trading jargon like different option strategies and trailing stop orders without turning to a search engine then you probably need to look at how you generate and implement ideas more so than if you were a neophyte. If everything you read, watch, or listen to sounds like gibberish then you more likely need to start from the very basics like the definition of a stock share. Do not overestimate your knowledge. This is a lifelong learning process. That is why it’s so much fun, you can never get bored. Do not be afraid to pick up a beginner’s guide book or use the internet to find one of the many videos, tutorials, and even free online courses to get you started.
For the absolute beginner, spending time reading books, articles on the web about how stock markets work is a good place to start. Do not start to watch financial news networks and get drawn into the theatrics and productions. Look to popular book stores for guides with high review ratings. Brush up on your math. Be comfortable with ratios, percentages and perhaps even simple probability. Do you know how to calculate the odds of rolling a 3 on a standard die like the kind used in board games? These will be essential before you even think of risking your money.
If you understand what option spread strategies are then you should start to look at how you can express your views on the markets with these products and start to look into simulating what your trading strategy would be like. Start to take notes like in a log or diary and ask yourself why you would put on a certain trade. Ask yourself what you would do if it did not work out the way you planned. Decide if you fully understand margin requirements and if you are comfortable enough to have a margin trading account.
- DO I NEED A SUPERCOMPUTER?
No. However YOU NEED A RELIABLE ONE. A computer that freezes up or shuts off randomly is completely unacceptable. You should have a screen with sufficient size to be able to comfortably read a price chart, buy or sell order entry screens, and to keep a web browser open for information. You should treat this computer like a surgeon treats their equipment. You want it to be predictable when you are placing orders and making decisions. If you share a computer or install a lot of software from the internet it is possible that you have a bunch of “pop up” or advertising software that will slow things down or if nothing else pop up a window for something useless in front of your order screen. Many brokerage platforms allow you to trade from smartphones and tablets. These devices make great backup devices and allow for casual observation of the market. Only in rare instances does it make sense to you use a smartphone or tablet as your main computing platform. More importantly is that you have a reliable internet connection with sufficient speed to see the markets move in real time. There is no reason whatsoever to trade with outdated information. You might as well donate your money to a worthy charity.
- WHAT BOOKS SHOULD I READ?
Anything that promises profits and never speaks of losses should be burned in a fireplace. There is no easy guide to profits. Your time is better spent on developing a sound process of decision making. The reality is that your trading and investing style will be as personal as your fingerprint. It will develop over time andwill be influenced by different books and articles that you read. Sometimes you will read something and think, “That is the absolutely worst idea I have ever heard of!” Believe it or not but that has contributed to your trader education. It forced you to think an idea through. That being said there is no complete guide. You should browse through a few titles and see whose writing style appeals to you and what subject matter you are most interested in. Is it chart reading, market psychology, portfolio management that interests you most. Does the author sound like a salesperson? If so, you are probably better off somewhere else. You need a realistic view of the world. Did you fall asleep after two pages? Again don’t waste your time. If you have never cared about investing before a good place to start is with literature that deals with the emotions of trading and how to keep things rational. Some suggestions are [amazon text=Reminiscences of a Stock Operator&asin=0471770884] and [amazon text=Trading in the Zone&asin=0735201447]. For more ideas visit our amazon store here.
- WHAT IS THE NEXT STEP?
Start to develop a routine. Decide what brokerage platform you are going to use. Consider qualities like ease of use, compatibility with your computer and mobile devices, customer service, educational tools provided, transaction costs, margin requirements, etc… This platform will be the tool you use the most so make sure you are comfortable with how it works. Next allocate time for you to catch up on the latest happenings and market movements. This can take anywhere from a few minutes to an hour or so each day. Take this time to review any websites you like to browse for trading ideas. Make a game plan for how you are going to approach the day and decide if the market is presenting any opportunities you feel comfortable taking on. Make paper trades (trades in which you only pretend to make the transaction) and do a post trade analysis. Did you get in for the right reasons? Did you get out if you realized you might have made a mistake? Did you follow a game plan? If you are ready to do a real live trade with money, you really should start small. Perhaps 10%-50% of the amount you were originally thinking of. You need to be comfortable with clicking the send or buy or sell buttons. You need to recover from any mistakes in making an order. These things happen. Different trading platforms have different ways of representing numbers. Sometimes you can be selling something and by entering a negative number for a price (because you think you should be receiving money) you are going against the system convention and you are paying the market to sell something. Do not think that anyone is above that kind of error.
- KEEP AN EYE ON THIS SITE
It is impossible to list all the things here you need to consider when starting out. One of the goals of this site, in addition to having posts related to the markets, is to also have posts that give insight into some of the ways traders think and approach the challenge of interacting with the market. So stay tuned. The most important thing is that you take that first step in learning. That alone puts you in a better position to control your financial destiny.