Learning About Trading for a Living
Whether you’re new to trading or a seasoned investor, many traders wonder: could I make a living trading stock? It seems like a dream – quitting your day job and simply make a LIVING trading stock from home (or anywhere!) is captivating. To many, it seems too good to be true, but making it as a stock trader can happen. The real question is the probability of making it.
Newbie traders, bolstered by success in paper trading simulators, sometimes throw caution to the wind and attempt to make their entire income buying and selling stocks. Some embody the digital nomad dream, trading the stuffy office for a beach on Koh Samui where they sit with their laptop and make bank. However, this is not everybody. Most independent traders use day-trading strategies, which can ultimately lose money over time.
But the allure of freedom is salient. Who doesn’t want control over their work hours, environment, and the financial freedom to do what they want? Trading is a tough job, with the right skill set and risk tolerance you could be a trader.
Discipline is Required
In order to be a successful trader, you must attain a level of focus and discipline not required for most other occupations. Traditional investors buy safe investments and allow equity to snowball over decades of time. Most people looking at going into trading aren’t looking at slow-building equity over time, they’re looking at day trading.
Don’t let beachfront office and coconuts fool you – workdays are often rigidly scheduled and fast-paced. To a day trader, the trading schedule and plan is a make-or-break formula. At predetermined times every day, the diligent day trader is taking notes on their watchlist stocks.
Effective traders must be stick to logical stock plans and not let emotions play in trading decisions. When the successful trader reaches a profit target on trade, they close the deal immediately rather than hesitating hoping for a larger profit. Similarly, when a trade turns bad, an effective trader cuts losses rather than falling trap to the sunk cost fallacy.
Trading – Get Educated!
Before you book the ticket to Koh Samui, it is imperative that you know everything you can trading-related. Familiarize yourself with all types of trading. That said, as a day trader you will likely be emphasizing on short-term strategies and the securities that collaborate best with them.
A beginning investor can find valuable information from the Securities for Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the Internal Revenue Service (IRS). Your local library can also be a valuable resource, many books can help a newbie get familiar with the world of stock exchange.
Once you establish your base knowledge of theories, products, stock analysis tools, and institutions within the market, take a test run on a paper simulator. Before you jump blindly into a career as a full-time stock investor, make sure you’ve maintained stable profitability over various market conditions on a trading simulator. It takes practice to become an effective investor, take the time to learn about stocks before you make the leap.
Strategy is Key – Choose a Good One
Take some time to research trading methodology. You will want a trading methodology that takes advantage of volatility, but also incorporates principles of risk management. Make sure this methodology is tested over time, months or years, and in a variety of market environments. You don’t have to start trading with real money at first. Wise investors work with simulated positions before swapping them out with actual risk-taking positions.
If you are hoping for stock trading to become your “rags to riches” story, you might want to look elsewhere. Day trading requires one to take on a significant financial risk: without capital set aside to mitigate this risk you are gambling.
Any financial advisor will tell you, have at least one year’s worth of income set aside before you attempt to make stock trading your sole stream of income. This money set aside is not to spend on your trades, you will need a separate fund for that. The year’s worth of set aside income is to fund your lifestyle while you build your portfolio into something profitable. Having a financial cushion will help maintain that discipline needed to be an effective trader. Traders make foolish mistakes when they are panic trading to make the rent.
For those using brokerage account, FINRA has some special regulations regarding “pattern day traders.” “Pattern day traders” are defined as people who open and close a position on the same day at a minimum of four times per week. In laymen’s terms, if you’re a person who trades every day, you’re a pattern day trader.
According to FINRA regulations, pattern day traders must maintain a brokerage balance of $25,000. Bear in mind that’s a maintained balance, not revenue, so that’s $25,000 on top of the fund you’ve set aside for your living expenses. Also, day trading must be done in a margins account, though these accounts are quite easy to open.
Effective traders need to be three things – cool, calm, and collected. Every trader feels the emotional blow of severe financial losses, the successful ones are able to weather them. The first few days and months of day trading are often shakey, you need to be mentally prepared for initial failure while building towards long-term success. Move past losses by making decisions based on logic and reason, not emotion. Learn from mistakes, don’t get caught in the emotional ups and downs.
Day trading is fast, volatile, and creates many adrenaline spikes in the brain of the new trader. Many investors get lost in the emotional flurry when they start. You will need a way to find your center while trading, because it is paramount for the effective trader to maintain a cool head, even in the face of financial loss.
These are some of the things you need to know if you want to make stock trading your main source of income. The lifestyle is not for everyone, and the odds are not in your favor. With self-control, effective strategy, and capital, you can levy the odds in your favor. If you’re one of the few who possess these, that beachside office on Koh Samui could be yours!