Are you looking for a trading career or a trade hobby? Before you embark on a trading career this is a very serious question you need to ask yourself.
Somewhere along the way, something piqued your curiosity and you got interested in trading careers. Maybe it was an article you read, or perhaps something you got in the mail. Thousands of people get handed a wonderful fantasy of easy street every day.
So instead of just putting money in an IRA, 401k or balanced mutual fund portfolio, you got into trading... "real" investing. Naturally you had expectations of considerably better than average returns.
But if you're just dabbling, trying something here and something there, devoting only a passive interest to your trading, you're asking for trouble. Because all you've got is a hobby. And hobbies are cost centers, not profit centers. If you treat trading like a hobby, you'll get the same results that hobbies bring.
And, by the same token, if you treat your trading like a successful business, you'll get business results. Successful businesses bring profits to the owners on a consistent basis, year after year.
Same thing if you trade for entertainment, then you're really not taking it seriously. Entertainment doesn't include much planning beyond when you're going to do something, and at what cost. If that's your idea of trading, good luck. Just make sure to keep trading in your expense column.
If you take your trading seriously, treat it as a trade career, you'll probably avoid another mistake that new traders make. Starting off under-capitalized.
There are several problems that come with trading an under-capitalized account. First of all, it puts severe limits on what you can do in your trading, that is unless you plan to violate good risk management practices. (Not advisable.)
It will also put severe limits on your ability to stick around, because if you start off too small and encounter a series of losing trades, you could soon be out of the game--even if you did all your entries and exits correctly. All traders have a percentage of trades that go in the wrong direction. And you can't expect an even distribution to the proportions. Even a system boasting 20 to 1 winners to losers won't go 20 winners in a row followed by 1 loser. You could start off with 4 or 5 losers in a row, followed by 80 winners. And if you're tapped out after 4 losers, you'll miss out on the winners.
Another big disadvantage of under-capitalization is that after a few losers, you're even more restricted on the trades you can enter. Some trades require a specific amount of capital, period. If you start off with only $5,000 and you're quickly down to $1,800, your choices become very limited. Plus, now you're at the point where you're only one or two losses away from being out of the game all together.
A business needs good money management, and so does your trading
if it is to be a business. That means you should properly assess how much you're risking on each trade and how much of your working capital you're putting at risk in general. Keep focused on your goals. Try setting yearly, monthly and even weekly goals. That will push you to start the process of reasonable money management.
One subtle way we keep trading as a hobby instead of a career, is to assume that paper trading alone will successfully lead to profitable trading. Paper trading has considerable merits, but until you have your money on the line and experience real risk, you cannot gauge your reactions to the emotions that trading brings up.
Practice the skills that make a good business. Be aware of the mistakes that traders make, their causes and the emotions involved. Plan your trading career thoroughly and put decision guides in place. Keep a trade journal and review your trades. You'll be putting yourself in the best position to be successful. Practicing these skills, as well as emotional control, you'll go a long way towards your dream of a successful trade career.
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