Now, you might have heard about some success stories, but Jason Bond is one little-known trader who turned his life around from being a New York State School teacher in debt, to a multimillionaire in just around four or five years. Now, you might not have the same success as Jason Bond, but you could learn some tips that most traders need to know when they’re first starting out.
When you’re first starting out, you need to learn proper risk management. That means you do not want to allocate too much capital to any one position. This is one commonality when traders or investors are first starting out. Let’s use some examples. If you have an account with $10,000, you would not want to risk more than 2% on any position. Let’s say you invest in stock A, and allocate 20% of your account to that position. That would be one example of poor risk management. That means if there’s unfavorable news and the stock drops 20%, your account would be down 4%. However, if you allocated just 5% of your portfolio to that stock, and it fell 20%, you would have only lost 1% of your portfolio.
The goal of trading is to stay in the game as long as possible until you can figure out your strategy. Everyone is different and has a different risk tolerance. However, when you’re first starting out, you should be fairly risk averse and not take on too large of a position that could wipe out a bulk of your account. You will generally have times of drawdowns, and you will want to limit your position sizing when you’re first starting out until you build some confidence and are consistently profitable.
Avoid Style Drifting
Let’s assume you’ve already learned proper risk management and defined a strategy that you’re comfortable trading and know that you are consistently profitable with that strategy. One of the worst things you could do is style drift, or start incorporating different strategies or not follow your rules. For example, if you know that you do well with a certain technical setup, you probably should not go out and start trading earnings or testing new strategies, until you’ve built up your account and could afford to lose a bit of capital.
Stick to Your Rules
Trading is all about discipline. If you’re not disciplined, good luck being successful. You should always stick to your trade plan, at all times. A trade plan is key to success, and is very similar to a business plan. Bond notes that every trading plan should have predefined rules, goals and how you are going to accomplish those goals. Now, everyone will have trading plans and different goals, but you should always stick to what you know and what you’re comfortable with. Your trading plan might include: asset classes you’ll trade, the strategies you’ll employ, how much you’re willing to lose, how you will do research and the amount of capital you would allocate to any one position. Again, everyone’s plan will be different. So when you’re first starting out, you’ll need to make a plan and stick to your rules.
The Bottom Line
Not everyone will be a success story like Jason Bond, but you could use these tips in an attempt to become a better trader when you’re first starting out. These tips are just only some of the keys to success when you’re first starting out, but they’re some of the building blocks to be a successful trader.