You Choose How Much You Risk On a Stock

Always a great suggestion for when you are starting out, after having paper-traded for a while (trading with fake money as you practice a strategy), you can begin by opening a small account.  Many brokers allow you to open with very small accounts, often as low as $250 according to what I’ve seen.  The mantra is ‘never trade with money you can’t afford to lose’.  If you feel like $500 might be a good amount to start out with, you can give that a try.  Just make sure that if you somehow lost it all, it wouldn’t be totally devastating to your financial well-being. How do you prevent losing it all? I’ll talk about that briefly in the next section.

You Can Cut Your Losses Short Using Stop-Losses

Contrary to any type of ‘crash’, be it big or small, when you are doing your own trading you are able to assess your own risk tolerance, and place trades accordingly.  Let’s compare this to say, your 401k or a mutual fund you might have some stake in. Somewhere around the end of 2008 the stock market began to tank pretty bad. Many people had 401k’s or owned mutual funds that were affected by this. After polling a few open friends about this, it seemed to me that many saw losses up to 40 and 50% of their portfolio! On the other hand, those such as myself who take care of their own retirement are able to set what is called a ‘stop-loss’ on any given trade that will pull it out when it reaches a certain point.  As an example, if I had $20,000 in my account and had one trade open, I would be able to set a stop-loss that might close the trade if my account balance reached $19,000, making it so I would suffer only a 5% loss.  A far cry from the 50% that some people have seen recently. It’s this exact reason why I don’t understand why some people claim that trading your own money is more dangerous than things like mutual funds or 401k’s.

Buying Stocks is a Very Simple Process

Lastly, I think that some people are turned away from the idea of buying stocks because they think that opening a trading account will be a difficult process.  This simply is not true.  As I remember, the last time I opened an account it was all done online, and was only a couple of pages.  Most of this was material that you are supposed to read, with a few spaces to fill out. After that it takes about two or three days to be approved, and you can find yourself trading in no time.  You are able to deposit money into your trading by sending a check or by bank wire, and in some cases you can even fund your account with a credit card. Withdrawing money? That is where all the fun is.  You can also do this in the same way; a check to your doorstep, or bank wire.

1. Decide how much you will risk – Open your trading account with an amount of money that if you were to lose it all, it would not ‘break the bank’, so to speak.

2.   Use proper money management – To avoid the above scenario from playing out, make sure that when you are buying stocks you only risk a small amount of your account per trade. This amount varies according to who you ask, but I don’t ever like to risk more than 1% on my main account.

3. Learn what kind of trading will work for you – You might decide that long-term, position trading is best for you, or that you just want to swing trade, holding positions for a few weeks at a time. Maybe you realize that day-trading is right for you.

4. Paper trade it first – Before you ever take a trading system to the real market, make sure you paper trade, or use fake money, first. Let the system prove itself, then begin with smaller amounts of money.

5. Have a second, more aggressive account (optional) – This one truly is optional, but something I have done, and have really liked, is having a second trading account where I started with about 25% of the amount of the original account. In this account I take the exact same trades, but am twice as aggressive. I risk 2% per trade here, but the rewards of course are twice as much.

6. Take profits from time to time – Buying stocks is not all about saving up for years or decades down the road. Use some of your earnings for living expenses, or for fun. It makes you realize that you really are dealing with money, and not just a virtual account of ‘nothing’. Treat yourself.

7. Be smart, always test – Continue to fine tune your trading abilities. Buying stocks is all about staying ahead of the markets, but know that things change. Sometimes the market is bullish, other times it is bearish. Make sure you are always aware of what is going on when you are buying stocks, and before you sell them as well.