For beginning traders, there are at least 3 decisions they have to make:
- How much capital to use for trading
- Pick a stock broker
- Design a trading plan
How Much Capital to Use for Trading
Before you put up your capital for online stock trading, make sure that you won’t need the money for a long time. Once you invested money for online trading, don’t immediately withdraw any profit or spend the money right after you have earned your first income. Don’t use the money that you have set for other things like for your insurance or for your family vacation. I know some brokers that allow you to open trading account with only $ 1,000, but I recommend that you open with at least $ 10,000.
Small amount of capital won’t allow for diversification or solid money management, in the end you will be taking too much risk.
Pick a Stock Broker
Picking a stock broker is not an easy task. There are numerous online stock brokers, and so little help in figuring out which one is right for you. Although you may not be able to tell everything about a stock broker, you can at least figure out if the broker’s been suspended for fraud violations or the firm has had numerous customer complaints. The Financial Industry Regulatory Authority (FINRA) has a free online tool that lets you check out everything from what licenses your stockbroker holds to whether or not the brokerage firm has had disciplinary actions against it. You can access it here.
Design a Trading Plan
A trading plan is your playbook for online stock trading. It should (at least) cover:
- Entry – your criteria for buying or shorting the stock. This could be a set of technical analysis or fundamental analysis, or a combination of both.
- Exit – your criteria for closing your open position, either for taking profit or cutting your loss.
- Money Management – how much to trade on each single trade and how to manage your overall portfolio. Money management will play a crucial role in your trading business. It preserves your capital, and capital preservation is the first rule in trading.
If you’d like to learn more about designing trading plan, you can read Smart Trading Plans by Justin Pollard. Also check out our stock trading for dummies and opening demo stock trading account article before you start trading for real.