Getting Started in Options Trading

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5 Steps To Start Trading Stocks

Maybe you’ve heard: The stock market has been on a bit of a tear.

The bull run hit its eight-year anniversary in early March, and while much of the coverage struck an end-is-near theme, investors remain optimistic.

(AP Photo/Richard Drew)

Maybe you’re feeling the buzz, too. Or maybe the recent scramble by brokers to lower their commissions — E-Trade, TD Ameritrade, Charles Schwab and Fidelity all slashed trade prices in the past month — is tempting you, as they were hoping it would.

In either case, you need to lay a foundation before you become the next “Wolf of Wall Street.” Here are five steps to take before you start trading stocks.

1. Get your priorities straight

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Your emergency fund isn’t being overly dramatic — it really is for emergencies. Anyone who bought shares of Chipotle before the E. coli scandal can tell you that money you invest in stocks doesn’t promise to be there when you need it.

On the other hand, stocks absolutely have a place in your portfolio for long-term goals like retirement. But that place should primarily be filled with index funds and exchange-traded funds, which are inherently diversified, at least among the market segment they track. It takes a lot of research, time and skill to build a diversified portfolio of individual stocks; it takes a few clicks to build that portfolio with index funds.

Bottom line: There’s a reason 401(k) plans don’t give you access to individual stocks; if they did, the retirement savings shortfall that many Americans are facing would probably be a lot deeper. You can buy stocks within an individual retirement account like a traditional or Roth IRA, but that doesn’t mean you should — at least not with the bulk of your money. Make sure that you’re saving enough for retirement in these accounts and that other short- and mid-term savings goals are covered before you start trading stocks elsewhere.

2. Build some knowledge

There are a lot of ways to pick stocks. Some people invest in their favorite toothpaste brand. Others go where CNBC points. Hardcore traders do in-depth stock research.

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You don’t need to be hardcore, but there’s a lot to be said for researching where you put your money. That means digging into the bones of a company and its financial status, or looking to price history and past movements as a way to forecast the future. It involves time, complex lingo, understanding of various analysis tools and, in some cases, the calculator you used in 10th-grade algebra.

There are plenty of ways to learn how to do this. Most online brokers have deep educational resources, complete with videos and webinars. Some have offices where you can speak to an expert trader in person. There are also online forums, stock-trading websites and NerdWallet’s guide to how to buy stocks.

3. Pick a broker

As noted above, online brokers are fighting for your money at the moment, so it’s a good time to give it to them; costs have been driven way down.

But costs aren’t everything when choosing a broker. If you don’t plan to trade frequently — and you shouldn’t, as that kind of churn drags down returns — you want to focus on a broker’s other attributes: the above-mentioned educational resources, a user-friendly trading platform and tools, free research and good, accessible customer service.

Some brokers and trading platforms also offer paper or virtual trading, so you can place a few initial trades with Monopoly money rather than the real thing. While earning fake money isn’t so exciting, the minimal pain that comes with losing it makes this kind of practice worth it.

4. Take it slow

There are people who jump into a cold pool head first, and people who use the ladder, jump up and down, yell and wince with every cold inch.

That also pretty accurately describes two schools of investing thought: The first is to throw your money in at once; the second is to do something called dollar-cost averaging, which essentially means investing set amounts of money at regular intervals. Research shows that the earlier you get your money into the market the better, but when you’re just learning the ropes, it can pay — literally — to go with the latter approach.

To do that, decide on a budget and then use that money to buy shares of your chosen company — or companies — at a set interval. When prices are up, your money will buy fewer shares; when they’re down, it will buy more. That means you’re naturally buying more at a low and less at a high.

5. Make a plan for when things go south

You certainly don’t want to sell at every blip, or at any blip. But if the above is a plan for how to get into the market, you also need a plan for how and when to get out — rules for how long you’ll tolerate a dive like Sears stock experienced due to years of down sales, for example, before jumping ship.

Decide in advance how far your stock can fall before you want out, or what major changes to the company or industry would cause you to go back to that aforementioned analysis to re-evaluate. Then stick to that plan to avoid panic selling in other, less dire, scenarios.

10 Steps to Becoming a Day Trader

In a world where everyone has easy access to online trading, why are there only a few succeeding as day traders? After all, what investor has not dreamed of becoming a day trader – working comfortably at a home computer, being your own boss, watching profits roll in? While many aspire, few actually succeed.

Key Takeaways

  • Day traders actively engage with the market, employing intra-day strategies to profit off quick price changes in a given security.
  • To become a day trader, you must be sure to be well-enough capitalized and have access to an affordable and functional trading platform.
  • Day trading can be a lucrative undertaking, but it also comes with a high degree of risk and uncertainty.
  • A thorough understanding of markets, financial securities, and behavioral finance – along with personal discipline and focus – are necessary for success.

What Does a Day Trader Do?

A day trader actively buys and sells securities, often multiple times during the day, but without carrying any open positions to the next day. All buy/sell positions taken during a trading day are squared-off on the same day before the market closes. Day traders are different from active traders who may hold a position for multiple days, or from investors who invest for longer periods. Day traders also use leverage to increase their intraday trade exposure.

How To Become A Day Trader

1. Conduct a Self-Assessment

Successful day trading requires a combination of knowledge, skills, and traits as well as a commitment to a lifestyle. Are you adept with mathematical analysis, full of financial knowledge, aware of behavioral psychology (in yourself as well as others), and do you have the stomach for entrepreneurship? Contrary to the perceived notion of an easy life or easy money, day trading actually requires:

  • Long working hours
  • Very little leave from work
  • Continuous self-learning with no guidance
  • Risk-taking abilities
  • Never-ending commitment to daily activities of the job

The right mindset is the most important (and the very first) requirement in becoming a day trader. Unless one is prepared to devote time, self-learn and be mentally prepared to take risks and suffer losses, do not try day trading. Books like “Trade Your Way to Financial Freedom” by Van Tharp and “The Psychology of Trading” by Brett N. Steenbarger are good resources for learning more about day trading and performing a self-assessment.

2. Arrange Sufficient Capital

No one can generate profits consistently. Intermittent and extended losses are part of the day trading game. (For example, a day trader may suffer eight loss-making trades in a row and only recover with profit on the ninth trade.)

To handle these risks, a day trader must have a sufficient cushion of capital. As Van Tharp explained in “Trade Your Way to Financial Freedom,” entering the trading world with only a small amount of money is a sure path to failure. Before quitting your job to trade full time, Tharp recommends having at least $100,000 for trading. Novices can start with smaller amounts, depending upon their selected trading plan, the frequency of trading, and other costs they bear. To actively day trade it is required that you maintain a balance of $10,000 in your trading account.

3. Understand the Markets

Day traders need a solid foundation of knowledge about how the markets function. From simple details (like exchange trading hours and holidays) to complex details (like the impact of news events, margin requirements, and allowed tradable instruments), a trader needs to have a broad knowledge base.

4. Understand Securities

Stocks, futures, options, ETFs, and mutual funds all trade differently. Without a clear understanding of a security’s characteristics and trading requirements, initiating a trading strategy can lead to failure. For example, traders should know how margin requirements for futures, options, and commodities significantly impact trading capital or how an interim assignment or exercise of an option position can shatter the trading plan completely.

Lack of knowledge about these necessities specific to securities can lead to losses. Aspiring traders should ensure full familiarity with the trading of selected securities.

5. Setup a Trading Strategy

Novice traders entering the world of trading can begin by selecting at least two established trade strategies. Both would act as a backup of each other in case of failure or lack of trading opportunities. One can move on to more number of strategies (with more complexities) later, as the experience builds up.

The trading world is highly dynamic. Trading strategies can consistently make money for long periods but then fail at any time. One needs to keep a close eye on the effectiveness of the selected trading strategy and adapt, customize, dump or substitute it depending upon the developments.

6. Integrate Strategy and Plan

Selecting the right trading strategies alone is not sufficient to succeed in the market. The following considerations need to complement the strategy, to come up with the trading plan:

  • How the strategy will be used (entry/exit strategy)
  • How much capital will be used
  • How much money per trade will be used
  • Which assets will be traded
  • How frequency to place trades

7. Practice Money Management

Let’s say you have $100,000 as trading capital and an excellent trading strategy that offers a 70 percent success rate (7 trades out of 10 are profitable). How much should you spend on your first trade? What if the first three trades are a failure? What if the average record (7 profitable trades out of 10) no longer holds? Or, while trading futures (or options), how should you allocate your capital to margin money requirements?

Money management helps you address these challenges. Effective money management can help you win even if there are only 4 profitable trades out of 10. Practice, plan and structure the trades according to money management and capital allocation plan.

8. Research Brokerage Charges

Day trading usually involves frequent transactions, which result in high brokerage costs. After thorough research, select the brokerage plan wisely. If one intends to play with one-two trades per day, then a per trade basis brokerage plan would be appropriate. If the daily trading volume is high, go for staggered plans (the higher the volume, the lower the effective cost) or fixed plans (unlimited trades for a fixed high charge)

Apart from trade execution, a broker also offers other trading utilities, which includes trading platforms, integrated trading solutions like option combinations, trading software, historical data, research tools, trading alerts, charting application with technical indicators and several other features. Some features may be free while some may come at a cost which can eat into your profits.

It is advisable to select the features depending upon your trading needs and avoid subscribing to ones which are not needed. Novices should start with the low-cost basic brokerage package matching their initial trading needs and later opt for upgrades to other modules when needed.

9. Simulate and Back Test

Once the plan is ready, simulate it on a test account with virtual money (most brokers offer such test accounts). Alternatively, one can backtest the strategy on historical data. For a realistic assessment, keep consideration for brokerage costs and the subscription fee for various utilities.

10. Start Small and Then Expand

Even if you have sufficient money and sufficient experience, don’t play big on the first trades of a new strategy. Try out a new strategy with a smaller amount and increase the stakes after tasting success. Remember, markets and trading opportunities will remain forever, but money, once lost, may be difficult to re-accumulate. Start small, test to establish, and then go for the big ones.

The Bottom Line

Aspiring traders should beware of websites and courses that promise foolproof day trading success or endless profits. The limited percentage of day traders who have managed to be successful do so by investing their time and efforts into building trading strategies and following them religiously.

A day trader is on his own in this big trading world. Before giving up your job to become a day trader, be sure that you have the motivation to continuously learn, design your trading strategies, and take accountability for your decisions and actions. If you’re looking to jump into the world of day trading, you can use one of the best stock brokers for day trading.

How to Become a Trader

Updated: March 28, 2020 | References

This article was co-authored by our trained team of editors and researchers who validated it for accuracy and comprehensiveness. Together, they cited information from 19 references.

wikiHow’s Content Management Team carefully monitors the work from our editorial staff to ensure that each article meets our high quality standards. Learn more.

Traders have to be able to quickly analyse lots of information and make well-informed decisions under high levels of pressure. Trading can be very profitable, but is also high risk. You can work for a financial institution, trading with the bank’s money, or money from the bank’s clients. You can also work with your own clients, advising them on good investment opportunities.

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