Trading Stocks for a Living
Trading Stocks for a Living
If you’ve ever considered whether or not to try trading stocks for a living, I would definitely encourage you to pursue it, but you have to approach it with a balanced perspective, and you have to realize that it’s nothing you should just rush into on impulse. Moving from a full-time job to a completely self-directed trading career can be unnerving for people who have never set foot in that territory before, even if they consider themselves to be stellar traders. There’s something about “cutting the cord” and going completely solo with your trading career that can give anyone a case of the nerves. So the transition from employee (or even small business owner) to full-time trader requires some initial planning in order to position yourself for maximum benefit when you “step out and step up”, so to speak. One thing to consider right off the bat is for you to have your financial life in order before moving into stock trading full-time. This means making sure that you have paid off all outstanding debts, with the possible exception of your mortgage. If you don’t do this initially, the money that you owe to Visa or MasterCard will start “talking to you” while you’re trading, and you’ll eventually make more emotionally-based decisions in your trades than decisions that are actually based on sound trading principles. You’ll start making decisions based on financial pressure instead of solid trading discipline. Once this happens, your confidence (and trading account balance) will begin to erode. So it’s very important to have no debt in your life that can “pull your strings”. The next thing that you should consider is your trading plan. You must always, always, ALWAYS have a plan for each trade. What markets will you trade? Will it be the blue chips on the NYSE, or will it be penny stocks, or will it be more index-based securities, such as the Dow Jones Industrial Average (DJIA) or the NASDAQ PowerShares (QQQ)? What will be your entry points, or your exit points? Believe me, your exit strategy should be thought out and accounted for before you even open the position. What if the trade skyrockets? Do you have a plan to trail your stops and capture that profit while “letting your winners run”?
Trading Stocks for a Living: Risk Management
Speaking of that famous saying, how will you “cut your losses”? Will you base your exit from losing trades on a percentage loss, or will it be based on a dollar amount loss? That’s another thing that many traders sometimes live in a state of denial over, and that’s trading losses. Every single successful trader—and I mean EVERY successful trader—has losing streaks. Do you have a risk management and capital management plan that takes losing periods into consideration? How much money will you risk per trade? Will you risk a percentage of your overall capital, or do you have a flat per-trade amount? How will you adjust your risk tolerance to accommodate for an increase or decrease in position size? Have you considered position size? How many blocks of shares will you trade? Will you purchase options for protection, or will you write calls/puts against your position for some extra income while you’re “waiting in the wings”? This may seem like I’m giving you the third degree, but you have to consider these questions and run every possible scenario through your mind, so that you can have contingencies in place to stabilize your trading account during times when the sailing is not so smooth. Even the top traders in the world, the professionals who hold million-dollar positions at a time, only experience winning trades an average of 3 out of 10 times. So risk management and capital management must become the number one priority in your stock trading, because your trading capital is literally the lifeblood of your trading career. With a sound approach to your trading style, and a sound approach to your risk management and capital conservation, the goal of trading stocks for a living can become much more attainable to the average investor.