Take it from someone who has tried, failed and succeeded many times over: the things you need to get started trading stocks have little to do with the actual act of trading stocks.
To trade stocks effectively, you must be in the best possible shape mentally. If not, you risk making a potentially stressful line of work even more stressful.
It’s akin to a professional athlete — a baseball player being the most appropriate example. America’s national pastime isn’t a contact sport, but it requires the same level of physical preparation as football or hockey. Treat trading like investing. Strive for the same patience, stamina, mental fortitude and myriad practical tools to day or swing trade as you need to buy and hold as a long-term investor.
Before you even create a stock trading account, you need money. And I don’t mean money to fund that trading account. While the exact amount varies from person to person, you should have enough money to live for at least three to six months. While an emergency fund is a personal finance basic, it’s a trading necessity. In fact, you might want to consider doubling whatever you think your emergency fund should be.
Money equals security. (That’s probably why you want to crush it as a trader in the first place, right?). Security equals the ability to have an “I don’t give a damn” attitude. You need this mindset going in because chances are you’re going to lose money, even if you do everything right. Along similar lines, you want to give yourself room to make mistakes. The old adage applies to trading — you learn by making mistakes. And, with trading, mistakes typically involve losing money.
Put yourself in a position where you can afford to lose a little bit of money and not worry about paying your bills and enjoying life. It’s the only time where I’ll equate trading to gambling, but it’s a lot more fun going to Vegas with money you can afford to lose than with next month’s rent.
While you’ll find people who tout various loopholes to the rule, abide by the $25,000 minimum equity requirement if you plan to trade stocks as a day trader. Here’s the lowdown from the Financial Industry Regulatory Industry (FINRA):
The rules adopt the term “pattern day trader,” which includes any margin customer that day trades (buys then sells or sells short then buys the same security on the same day) four or more times in five business days, provided the number of day trades are more than six percent of the customer’s total trading activity for that same five-day period. Under the rules, a pattern day trader must maintain minimum equity of $25,000 on any day that the customer day trades… If the account falls below the $25,000 requirement, the pattern day trader will not be permitted to day trade until the account is restored to the $25,000 minimum equity level…
The primary purpose of the day-trading margin rules is to require that certain levels of equity be deposited and maintained in day-trading accounts, and that these levels be sufficient to support the risks associated with day-trading activities.
If you’re not going to day trade stocks by definition, use your head. Ensure that you don’t trade beyond your means by exposing yourself to too much risk, which includes, at the top of the list, margin risk and the dreaded margin call.
If you trade without a disciplined plan, you’re going to end up a loser. You can’t trade in the short-term on the basis of un- or loosely-defined whims. Observing that Apple (AAPL) tends to drop at the open on Tuesdays and spike just before lunch (I’m not saying this happens) is not a trading plan. You need something much more sound and sophisticated. While I can’t tell you exactly what that is, I can provide general guidelines.
Make sure there’s a basis — rooted in method, be it scientific or otherwise — for your trading plan. You might be sharp enough to come up with your own. You might need to rely on somebody else’s. Either way, test it. And test it again. And test it again. And test it one, two, three more times. Backtest it. Trade on the plan using a mock account with fake money. Don’t fall for get rich quick trading schemes, larger than life promises or cult-like trading programs. If those things worked, we would all be trading multi-millionaires.
Money management plan
Going into your life as a stock trader, set hard and fast goals about how you will manage your money. Here again, the way this gets done varies from person to person, but it must get done. And you must take your money management plan seriously.
Here’s what I mean, in the most practical terms, by a money management plan. Set rules. Stick to them. For example, set a limit for how much you’re willing to see your balance drop below your initial deposit. If you start with $50,000, maybe you never want to see your equity drop below $45,000 or $40,000. This means you’ll need to set rules for your first several trades, building up your account to a point where you can take bigger risks.
If you see success, you might be inclined to double down, however consider one of money management’s smartest principles — taking cash off of the table. If $50,000 suddenly turns into $75,000, use $5,000 or $10,000 to pad that emergency fund. If you’re lucky enough to do this several times, you’ll find that you feel more secure financially and you’ll be able to move money between accounts (emergency and trading) with more flexibility and greater confidence.
Treat trading like a job. There’s nothing more annoying in the world of stock trading than the person who floats the notion of moving to Hawaii or California, waking up in the wee hours of the morning, making a killer trade or two and spending the rest of the day laying on the beach. This sounds fantastic, if you can do it. But you probably can’t. So you shouldn’t even fantasize about it, let alone try.
And why would you want to do this anyway? Are you looking to be a wunderkind or do work that satisfies while helping you live a good life and achieve financial goals? I emphasize work because, as with most other endeavors, to become good — or great — at something you have to work hard. This doesn’t mean waking up at 4 a.m. with the goal of finishing your day as soon as possible. It means putting in the hours.
Maybe you’ll have days where your first trade of the day takes less than an hour to complete and nets you thousands of dollars. That’s fantastic. And there are probably some days when you should reward yourself and call it a day. That said, on most days, when you’re done trading (whether after an hour or eight), you’re probably best off doing something else that will make you a better trader — review and refine your trading and/or money management plans, research charts and stocks, learn about a new indicator or get more comfortable with one you already use, read books about trading. Immerse yourself in trading. Treat it like a job.
These five things you need to get started trading all have one thing in common. They are designed to stave off and reduce the stress associated with the job. If you go into trading feeling desperate and in need of a quick buck, you’ll likely, at best, not be a trader for long or, at worst, go off the deep end. Set yourself up for success by solidifying your strategy and preparing yourself to act responsibly before you even make your first trade.
Rocco Pendola is a freelance writer and editor in Los Angeles. Pendola contributed and worked full-time at TheStreet and Seeking Alpha, prior to taking a break from financial media to follow his passion as a craft cocktail bartender.