web analytics

Reader Mike asks:

How do you think a beginner should start trading?

Hi Mike. Good question, and I don’t think there is one possible answer. I can tell you that the most important thing this new trader needs to do is to moderate her expectations. There are still people selling trading courses and books who would suggest you can open a $5,000 account, learn a few trading patterns, and make a living trading. This is very unrealistic. First of all, that new trader needs to realize that she is probably not going to have any real financial success, perhaps for the first three years. Plan for a very long learning curve, and be prepared that your progress will not be a straight line. Second, be realistic about the returns you can make. 25% annually is an excellent return for a trader; there are very few traders who can do that consistently. (And no, sometimes you will hear that this doesn’t apply to daytraders. Daytraders are not immune to the laws of finance. Successful daytraders do not make hundreds of percents a year on their capital with any consistency.) Consider the size of your trading account carefully—you do need a significant pool of capital to make a living.

(It also should be mentioned that too many people focus on exceptional cases like Marty Schwartz. Yes, there are superstars. New traders tend to be a very confident bunch, but don’t plan for outlier performance. Maybe you are going to be the best trader ever, but that should not be part of your trading plan. This is planning to fail. Make realistic plans that respect reality.)