Profit From Prices

A book on stock market trading
By Jayesh Patel, CFA

Chapter 2 continues

Chapter 2

Plan Your Trading and Trade as per your Planning (2)

As mentioned earlier, people enter trading without any plan or any idea about how they want to approach trading. To me, trading is like a business and like in any business one needs to do some thinking and planning before he gets in. One has to decide how much money he wants to start with, what his strategy is and what the goal is. I strongly believe one should write down these things on paper before he makes any trade. This is like having a business plan.

Let me give you some ideas about what should be part of a good trading plan.

How much money do you need to start trading with?

There is no standard number. It all depends on one's financial situation, circumstances, experience, investment objectives and risk tolerance. For a novice trader, I think he should start with an amount from 5 to 20 thousand dollars. This starting amount has to be the amount that if one loses it all, it will not create financial hardship for him or for his dependents. If it were all lost, it wouldn't create a stress on one's bank account, retirement plans or on lifestyle. This is like a risk capital. Let me highlight the importance of this starting amount. There is a big difference between trading and any other business. In any other business, it is not difficult to determine when to call the quit. However in trading, I have seen people continue trading for a long time despite the fact that they know that they are not making any money! May be it is hard for one to accept the fact that trading is not for him or maybe it is the hope of winning in the end that is not letting people quit the game. Nevertheless it is very important for a person to accept his limits and understand that there are a lot of things for which one does not have necessary skills, emotions and/or aptitudes. Every one of us can't be a successful auto mechanic, plumber or a heart surgeon! In the same way, the stock trading may not be appropriate for every one of us! This is why it is important for a person to start with a pre-defined risk capital to test himself for trading, and then if successful, he can keep doing it. If he loses his risk capital, he will need to stay away from trading for a considerable time if not forever.

Write down here: My risk capital is: ___________________

What is our objective with regard to trading?

When a person starts a business, he has some goals, objectives or expectations about how much business he wants to do or money he will make/lose over a specific period. As I keep saying, trading is also a business but you would be surprised to know that there are a lot of people who have no goals or objectives when they are trading. (I am not talking about dreams of making millions! They are there in every trader!!) Unless a person knows where he wants to go, how can he plan? Unless he plans, how can he reach there? If a person has a goal, he can create a road map or a plan to reach there. To have some profit objectives is absolutely required if one wants to be a successful trader.

If you are starting with 20,000 dollars, an objective could be to make 500/1,000/1,500/2,000 dollars every month. Or it could be like 10, 25, 50 or even 100% return per annum. Start with a number that makes sense to you and then later in the Chapter you will see if this goal is achievable or not. If not, you will need to fine-tune it.

Write down here: My goal is profit of _______ per month or ____% return per annum.

 

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