How to Start Trading in Stocks and Futures
Making consistent income from trading is hard. I know because I tried. I’m a perpetual learner, yearning to find new ways to add more income and an experimenter. Trading has challenged me at all different levels, financially and psychologically.
My journey in trading started in 2001, just after the tech bubble. I started with 1000 dollars and months later, reached my financial goal and exited out of all my positions. I researched, made a plan, bought shares and traded with simulation money before attempting with live money, and then rinsed and repeated. The result over the years was decent.
A year ago, I tried a different strategy (day trading) and failed miserably. Any money I gained, I quickly lost as I struggled to grow my equity. I became too emotional with my money and my account reflected this fear. I read a lot about trading to psychologically prepare me for day trading, and it turns out that I was experiencing the same emotions and struggles that many other traders experience.
The North American Securities Administrators Association published a study concluding that the majority of traders lost money and a vast majority of traders ran the risk of losing their entire stakes. The most frequently cited is a study by Ronald L. Johnson ‘ An Analysis of Public Day Trading at a Retail Day Trading Firm – Report of the Day Trading Project Group Findings and Recommendations’
Putting this in perspective, Yes, most day traders fail — about 80 percent in the first year. But so do a large percentage of people who start new businesses or enter other occupations.
First Year Failure Rate (%)
Real estate sales
Training for a marathon
After experiencing this failure, I decided to get educated. I found a mentor and soon after I became a much better trader. To become a proficient trader requires a significant amount of practice, discipline and dedicated training. It involves tears, hundreds of hours of hard work, and ongoing training.
If you have ever contemplated trading as a side hustle, it is difficult but not impossible. If you have money you can afford to lose (ideally a small percentage of your net worth), discipline, interest in the markets, and training, it is possible to be successful. Here are ten things you need to know based on successes and failures as a trader.
1) Never trade money you can’t afford to lose. If this money is your retirement fund, education fund, or necessary to your mortgage, you are going to fail. You will become too emotional with your money.
2) Educate yourself in a style of trading in which you are comfortable and compatible. There are different styles of trading, from position trading to day trading and scalping. The shorter the time frame, the harder it is, and the higher the failure rate in growing your equity.
3) Are you using a successful trading strategy that has been back tested thoroughly? If you don’t know what this means, you need a lot more education to trade.
4) Always assess risks before reward. If the risk is greater than the reward, and you lose, you need to win a lot more trades to recover that loss.
5) Trading successfully takes practice and serious commitment. Can you commit to practicing on a simulator for at least several months, sticking to a trading plan and following a trading strategy religiously? If not, don’t try it.
6) During simulation trading, are you discipline enough to stick to your rules – e.g. entries, targets, stop losses, time frames, etc? If you can’t do it on a simulator, forget trading live money.
7) Before transitioning to live trading, your simulation (sim) account must meet your financial goals. Sim trade a proven strategy for at least six months to a year before deciding to go live and only when it meets your financial goals. The best traders take their time to sim trade.
8) Do you have the right temperament for your trading style? Evaluate your strengths and weaknesses before even considering trading. If you are emotional, impulsive, impatient, trading isn’t for you. You are better off as an investor with much longer time frames or doing something else with the money.
9) Do you have the mental strength to take losses? Losses will happen often. The key is to have more wins than losses and grow your equity over time.
10) Trading very frequently can evolve to another job. Can you see yourself staring at the markets and screens for hours and hours, and do nothing? This means not making any money, which can evolve to days.
You can improve your chances of success by implementing all of the above lessons learned. If done right, trading can be a very lucrative hustle but it takes time to become consistent. There are many retail traders who trade out of their own home, as a side hustle or as a full-time job making income. If you decide to go down this path, always assess risks before reward. Most importantly, only trade money you can afford to lose.
Have you ever traded before? If so, what are your lessons learned? Or do you prefer investing?