This article will explore how to get set up as a trader.
Getting started as a trader may seem complicated. You may wonder what type of equipment you need, how much capital to start with, and what information you’ll need to set up a brokerage account.
We’ll go over all of these issues below.
Many beginning traders wonder how much equipment they need to get set up as a trader. To be successful at trading, does a person really need multiple monitors to track different assets?
What about the speed of the PC being used? Do traders need top-of-the-line PCs?
The answer is that beginning traders simply need a fast enough PC that it will not freeze up or lag when trading. To get started trading, you don’t need multiple monitors or a PC with huge amounts of RAM.
Having stated this, you should always check the system requirements of the software for the broker you plan to use.
If your PC is an older model that has not been upgraded in a while, it may not be compatible with your broker’s software. Otherwise, this usually isn’t too much of a problem.
Of course, having multiple high-res monitors and fast computers can make trading more enjoyable. So once your trading business becomes profitable, feel free to indulge yourself.
But if you can’t afford these items right now, they are in no way necessary to get set up as a trader initially.
How Much Trading Capital?
Another question often asked is: “how much capital do I need to get started?”
Many stocks are available for $100 or less. So it may appear that this amount is all that is needed to start trading.
But losses are a part of the trading business. No matter how good you are, you will still sometimes place losing trades.
For this reason, you need to have a large enough account to weather losing streaks. If you are planning on trading stocks or options in standard account with no margin trading, try to set aside at least $5,000 of capital for your account.
For a margin account that amplifies both gains and losses, you may need as much as $50,000 to have an adequately capitalized account.
It’s also important not to invest money in trading that you need for other things. Your first priority should be household expenses, followed by savings in a diversified portfolio. Trading capital should come from what is left over after these things are taken care of.
This way, you don’t have to get overly stressed worrying about what happens if you have a losing streak.
Budgeting for Trading
If you do lose money in the beginning, set aside part of your income to be used for refilling the account. But whatever amount you decide on, stick to it.
In the beginning, while you are still learning, you need to keep your losses small. But it’s easy to think you are going to win back whatever you lost if you just put more money in the account.
Having a trading budget worked out ahead of time is an important part of getting through this early period without losing too much.
You’ll also need to set aside money for trading education. Learning to trade takes time, and courses on how to trade are not always free. So be sure to factor this in when making a trading budget.
Choosing What to Trade
Once you’ve got the equipment and are set up with a budget, you’ll need to decide which assets you want to trade.
If you think you are good at predicting broad moves in the stock market as a whole or in a particular industry, you may want to trade Exchange Traded Funds (ETFs).
These funds may contain stocks that make up a particular index such as the S&P 500. Or they may contain the largest companies in a particular industry such as gold mining or health care.
If you know a particular sector pretty well and are familiar with its key players, you may want to trade individual stocks within that sector. For example, if you know a lot about the retail sales market, you may want to trade shares of Costco Wholesale (COST), TJX Companies (TJX), and Target (TGT).
Another asset you can trade is options. An option gives you the right, but not the obligation, to buy or sell a stock at a particular price.
There are a number of advantages to trading options instead of stocks.
For example, buying a call option on a stock is cheaper than buying the stock itself. And if the underlying stock goes to zero, the trader only loses the price he paid for the option. This limits possible losses to the trader.
For another example, options provide a simpler way to go short on stock. If a trader believes the price of a particular stock will go down, he can buy a put option on it. To make this same trade with an individual stock would require the trader to borrow shares from his broker.
These are two simple and common examples, but they can be risky. As I teach in my programs, an option is a depleting asset simply from the passing of time. For this reason, it’s usually better to sell options, and/or to use some sort of hedge for risk management.
Opening a Brokerage Account
After making these decisions, the next step to get set up as a trader is to open an account with a broker.
Opening a brokerage account is similar to setting up an online bank account. You may need to use a mobile app to take a picture of yourself and your ID, or you may need to provide a scanned ID.
You’ll also need to have your bank account information handy so as to link it with your new brokerage account.
Most brokerages offer multiple account types. Some accounts may only allow stock trading while others allow options as well.
Some accounts allow margin trading. This means that the broker will let you borrow capital to buy assets. This will give you leverage, magnifying both gains and losses.
This can be very useful to traders. But it can also be very risky for traders with small accounts. If you aren’t ready to take the risk of using margin, stick with a standard account.
Learning to Trade
If you’ve been looking for information on how to get set up as a trader, you probably already know a few things about what causes price movement.
But becoming a truly excellent trader takes study and practice.
Making Your First Trades
When making your first trades, be sure to do so on a paper trading account or demo account. These accounts do not use real money. They are just for practice.
You will probably make many mistakes when you first begin. But trading on a demo account will allow you the freedom to learn without having to use real money.
Once you’ve been making profits consistently on the demo account, you can then switch over to a live account when you are ready.
We’ve gone over how to get set up as a trader. We’ve explained what equipment you need, how much capital is required, what you’ll have to do to open a brokerage account, and more.
We hope this information has been of help to you in beginning your journey as a trader. For more helpful tips on how to trade successfully, check back to this blog regularly.