Trading 101: The M&Ms for Successful Trading
Anyone who has an idea about becoming a trader and just turning a key to unlock the vaults of wealth will soon discover that it’s not that easy.
So just what does a trader need to become successful? We’ll answer that with a series of Ms.
MONEY
You have probably heard the expression, “It takes money to make money.” That is certainly true in trading. You can trade without having a lot of time or knowledge or experience. In fact, the trading crowd will be glad to see you come into the marketplace. But one thing they won’t allow is letting you into the trading game without money.
The money requirement can be split into two categories:
Trading account. You will have to have a brokerage account, and the size will depend on what you plan to trade. You will not be trading E-mini S&P 500 Index or full-size gold or silver futures contracts with a $5,000 account, even if you have the secrets of a Holy Grail system.
Brokers and exchanges have minimum margin requirements – the industry prefers “good-faith deposits” – to assure the terms of the contract are fulfilled and preserve the integrity of the marketplace. You also should have a cushion beyond that to cover adverse price moves, commissions and other trading costs.
The amount of money in your account may dictate what you can trade, how much you can trade and how you trade. The biggest reason for trading failure is an undercapitalized account. The funds for this account should be money you can afford to lose and not rent or grocery money.
Support services. Depending on your style of trading, you will probably need a computer, some type of internet connection, data/price quotes, analytical software, information/advisory services . . . It’s all part of acquiring the knowledge you need to make trading decisions and handle your trading activity before you hand your money to the marketplace. Expenses for these resources can be significant.
MINUTES
Maybe it’s minutes or moments or months, but learning to trade and actually trading will require some amount of your time. Others may have more money or resources than you do, but everyone has the same amount of time. The question is how much time you can allocate to trading. Do you have a demanding day job or a family that needs a lot of attention?
Depending on your trading style, trading successfully requires time for research and decisions. You need to learn about not only the markets you are trading but also about the characteristics of trading instruments and the trading process itself to understand the risks and opportunities you may be undertaking.
MENTALITY
Do you have the personal traits that it takes to develop a trading mentality? These traits are more difficult to define because they can vary from one person to another. In some cases, traits like “persistence” or “patience” or “impulsive” can be trading assets; in other cases, they may be faults that can wipe out an account.
Determining your personality obviously involves a thoughtful self-evaluation. It is easier to adapt a trading program to fit your personality than it is to mold your personality to a trading program. Along the way, here are a couple of tenets you will need to accept as part of a trading mentality:
o It’s okay to speculate. You have probably heard derogatory references to speculators, but traders provide a vital market function by speculating on a change in price and assuming risk that already exists for someone. Speculating is not gambling.
o It’s okay to be a loser. You likely do not intend to lose when you enter a trade, but you should assume that every trade will be a loser and set up your strategy accordingly. The key to successful trading is cutting losses short to preserve your trading stake.
o It’s okay to be “short” as well as “long.” You can sell something you don’t own, speculating on a price decline.
METHOD
Assuming you have all of the other M factors in order, now you need some method to trade. It may be based on fundamental analysis or technical analysis. It may involve day-trading or short-term swing trading or long-term position trading. It may include stocks or exchange-traded funds or options or futures or currencies.
All of these factors should be included in a trading plan designed to trade successfully – how to arrive at a trading decision, where to enter, where to exit, how much to risk . . . It may not come together overnight, but trading done well can be a very rewarding experience.
