Are You Ready to Trade Stocks? Part 1: What Do You Need to Start?

The first of a three part series about getting ready to trade stocks.

What you need to start trading stocks.
Are you ready to start trading stocks?.

Today's article is the second of three in a series by guest author Adrian Reid, private trader and founder of Trading System Life. You can also follow him on Twitter @TradingSysLife

Are you ready to trade stocks?

Trading stocks is one of the lowest barrier to entry investment activities you can do. All it takes is to complete an application form and fund your brokerage account and you can get started.

Similarly, taking your first trade is equally easy - all that takes is an idea, tip, or trading signal and about 30 seconds to place your order!

But are you really ready to trade stocks?

Low barrier to entry…higher barrier to profit

With such a low barrier to entry and the promise of quick profits, it is little wonder so many people are getting into stock trading. There is just one problem - the vast majority of people who start to trade stocks end up losing money and quit with less capital than they started with (or wit no money at all).

The challenge is that there is a big difference between opening your brokerage account and actually being ready to trade stocks. This is a low barrier to entry game, but the barrier to profit is higher than you might think.

The good news is that the barrier to profit when trading stocks is not insurmountable, it is just higher than most new traders think it is.

This article explains what you need to have in place to get ready to trade stocks profitably. These pointers are what you need to help you get over the 'barrier to profit' and beat the majority of people who will lose in the long run.

What do I need to really be ready to trade stocks profitably?

There are 4 things you need to be ready to trade stocks profitably:

 

  1. Written Trading Goals
  2. A Profitable Stock Trading System
  3. Risk and Money Management Rules
  4. A Written Trading Plan

Why are written trading goals so important?

We all have different situations and different goals in our life, and our trading goals are no different. Some people trade stocks for long-term wealth building, some for passive income, and some for active income.

Just as our reasons to trade stocks in the first place can be different, we also all have different risk tolerances. You may be comfortable with a 20% drawdown in your account, but I may only be comfortable with a 10% drawdown. You may be comfortable with being right on 50-60% of your trades as long as you make money overall, but I may be comfortable with being right on 30-50% of my trades as long as I make money overall.

Objectives are important because there are many different ways to trade stocks, and until you are clear on your objectives you will have trouble making informed choices about which strategy or system to use, how to manage your risk, and how to size your positions.

As a minimum you should write your objectives for the following areas:

  • Maximum drawdown on your initial capital
  • Maximum drawdown on your total ongoing capital
  • Average annual percentage return
  • How much time you will spend on your trading (each day - week - month)
  • Longest time between new equity highs (how long you are willing to be in drawdown)
  • Reliability of your trading (% of winning trades you need)
  • Size of winning trades vs. size of losing trades

Once you have these, you are then in a good position to select or design a profitable stock trading system.

Photo Credits:  Westend61/Westend61//Getty Images