Mark Chalon Smith's article has been provided by Moneyshow.com
A few years ago, an unusually forthright day-trading site warned newly arrived investors that they would lose $10,000 before they learned enough to make any money.
If possible, that's not pessimistic enough.
Yet who hasn't thought about taking charge? There is a small cadre of private investors who can live off their winnings, sometimes making more overnight than most people do in a year. They do not settle for 1.4% CD rates, or torture themselves by buying index funds that are never quite the right index fund. They use the same tools available to you, if you dared: options, futures, foreign exchange.
With online trading, disarmingly easy. But should you really do it? The simple answer: No way. The markets feast on the uninitiated and overconfident.
There's another answer as well: You could be one of the winners, if you invest the hours and hours of research needed to play the game confidently and consistently. It is the difference between riding in a plane and flying one.
Ready? Now Ask Yourself …
Do you really want the responsibility?
If your first position lost money, would you be miserable or learn from the experience? Would you lose your cool if you made a few poor decisions?
Ross Levin, the president of Accredited Investors Inc., a financial planning firm based near Minneapolis, recalls a doctor who resisted becoming a client - until the bad moves stacked up. "A very smart man, but he was too reactive," Levin says. "He traded 30 times a month, usually responding to news or other market events. It wasn't working for him; he was making too many poor choices."
These days, he lets Levin do much of the heavy lifting in determining which investments are best and how long to hold them. His account is growing and he feels more at ease. Steady hands are best for driving a portfolio, whether aggressive or tame.
Do you consider yourself an idiot or savant?
You think you understand the inner guts of the market, but do you really? You are about to gamble your hard-earned cash on it.
"The typical person is not willing to do what it takes when it comes to buying stocks," MSN Money columnist Liz Weston cautions. "Most likely you will make mistakes. That's why I recommend keeping it really simple - I buy index funds."
Are you at ease with the online world?
You'd better be. A full-service brokerage that executes your every whim will in the end eat your grubstake whole.
At the very least, you'll need to navigate the Web adeptly to research individual stocks and to execute your trades. At the other end, some of the tools provided by online brokers for modeling investments and finding winners are excruciatingly detailed and demanding - yet those charts, technical analysis and screening tools may offer your best chance of making real money.
5 Steps Before You Lose a Nickel
If you're still determined, here are some first steps:
1. Research, Study, Learn
Rule of thumb: If you can't explain a strategy to your neighbor, then you don't really know it. Want to use options? Then you'd better understand them, in detail. If you can't explain the difference between a put and a call, then find a good Web site, get a book or talk to an expert to learn. Also, look for investing seminars, in both the real and virtual world. Check with your broker if any are scheduled at a local branch or online.
2. Talk to Professional Traders
Many web-based brokers with active trader components have members or employees eager to discuss their experiences. Call thinkorswim, for example, and ask for advice. They'll hope you open an account, of course, but they should tell you what to expect, including the pitfalls.
3. Decide How Much of Your Money is Speculative
That's a fancy way of asking what you can afford to lose without crippling the other plans in your life. Ten percent? 50%? All of it? Do you plan to stick with your own cash or get adventurous and use margin? Most sophisticated accounts automatically provide margin (increasing your buying power, usually two or four times), but you can get slaughtered if a trade goes south and you're hit with a dreaded "margin call."
4. Do it on Paper First
Many proprietary platforms allow clients to practice with fake money and fake trades. Not ready to open an account? Then try it on your own: put trades on a spreadsheet and monitor their progress and your reactions to them. Did you make good decisions all down the line?
5. Go Slow
If you do decide to go it alone, take it easy especially at the start.
Trade with, say, 25% of your stake and increase the amount as you become more comfortable. Buy companies you understand and are already familiar with.
The Bottom Line
"Don't get overconfident if you do well. You'll have winners--and losers." says Joe "JJ" Kinahan, the chief derivatives strategist for TD Ameritrade (which owns the active trader site thinkorswim). He notes that the biggest mistake novice traders make is failing to plan an exit strategy, such as using stops to dump losing stocks or options to hedge losses.
At this level of investing, even losing money is a skill.
Investing BasicsPlain vanilla is a term used in investing to describe the most basic types of financial instruments.
Mutual Funds & ETFsFind out why mutual funds are not insured by the FDIC, including why the FDIC was created and how to minimize your risk with educated mutual fund investments.
ProfessionalsLearn about the various talking points you should cover when discussing mutual funds with clients and how explaining their benefits can help you close the sale.
ProfessionalsBefore you sell mutual fund shares, consider these tax strategies first.
Options & FuturesProfessionals choose the options available to you in your plan, making your decisions easier.
Fundamental AnalysisOptions market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
Mutual Funds & ETFsLearn about the different types of mutual funds and how to know if your financial advisor is choosing the right funds for you based on your investment goals.
Mutual Funds & ETFsTake a closer look at the Lipper rating system for mutual funds and exchange-traded funds (ETFs), how investors should interpret it, and some possible criticisms.
Mutual Funds & ETFsLearn about the important factors to consider when looking for mutual funds that pay high dividends, including how they may impact your taxes.
Mutual Funds & ETFsLearn how the major rating agencies assign mutual fund ratings. Understand what these ratings measure and how they are different from each other.
Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>
Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
Financial advisors are reimbursed by mutual funds in exchange for the investment and financial advice they provide. A financial ... Read Full Answer >>
Fiduciary duty is one the most important professional obligations. It basically provides a much-needed protection for individuals ... Read Full Answer >>
Mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high ... Read Full Answer >>
Financial advisors governed by fiduciary duty are bound by law to act in the best interests of their clients at all times. ... Read Full Answer >>