When you first move towards getting started trading, it can certainly seem like a daunting experience! You’ve decided you want to be in control of your own financial future but are not quite sure exactly how you go about doing that. Maybe you’ve heard friends discussing trading or watched a documentary about trading on the television, but none of that has actually told you what you really need to know. Being new to trading, it is only natural (and very sensible) to want to ask lots of questions before diving headlong in and getting started trading. So what is the essential information that every novice trader should know? Here are the answers to some of the questions that I most frequently get asked about trading:
How Much Money Do I Need to Get Started Trading?
You could start from as little as £1,000 and then the sky’s the limit. Though, at this level, it’s going to be really hard work to make anything meaningful, especially in the short term. You’re going to have certain costs to pay e.g. for charting software, spreads / commissions or margins you’d have to deploy. In addition, there is the opportunity cost of the time you need to spend trading. At the £1,000 level you may well get completely frustrated and not be able to trade your plan as you’d want to, and that can spell failure.
What I would say (and what many don’t point out!) is that if your opening balance is small, don’t expect it to turn into a miraculous amount in a short space of time. A seasoned professional trader would be very happy with a 70% to 120% return per annum. That would mean your £1,000 becoming £1,700 to £2,200 – a very good return!! Not the 1000%+ return though that some promise!!
I personally think that you need at least £3,500 to get you going if, for instance, you are spread betting. Other forms of trading are going to be expensive and will depend on the asset class you want to trade e.g. FX, Equities, Commodities and your ability to get access to the right broker, but are not out of the realms of possibility. Remember we are trading here, not investing, for those wondering why I didn’t recommend equities.
My recommendation is if you want to trade and have less than £10,000 then do spread betting. Actually, spread betting is a favourite of mine and I’d still use this format on a portfolio anywhere less than £100,000.
How Much Money Can I Make Trading?
How long is a piece of string?! Traders are some of the wealthiest people around, but like any other profession, the top earners are few and far between. It takes time, effort, skill, experience, a bit of luck, in fact a million different variables to hit the big time, so to become one of the 5% of winners in this game with the odds stacked against you is a challenge. It is, however, perfectly possible to make a nice income from trading if you have a well-defined trading plan, some decent strategies and follow some basic trading principles and rules. My rule here is, “be realistic” and have sensible expectations that fit in to your own lifestyle!
Here are some examples of potential portfolio returns:
You start with a £10,000 pot
A 1% return per month would give you:
1yr portfolio value of £11,268 3yr portfolio value of £14,307
A 5% return per month would give you:
1yr portfolio value of £17,958 3yr portfolio value of £57,918
A 10% return per month would give you:
1yr portfolio value of £31,384 3yr portfolio value of £309,126
The above are all very achievable targets. But I hope you appreciate that it is extremely unlikely that you’ll be able to turn £1,000 into £100,000 in the space of a year; or even £10,000 for that matter – a fully-fledged professional would be over the moon with those sort of returns!
How Much Money Can I Lose Trading?
In theory you could lose it all, but you shouldn’t.
By using sensible, and quite frankly, very common sense Risk and Trade management techniques to limit your losses, you should always be able to remain in the game and keep the balance of your portfolio still healthy.
One of my golden rules of trading, which I almost always dispel as the first piece of advice I give out is:
“Only put a sum of money into trading that you are comfortably prepared to lose.”
This rule is especially important in terms of the psychology of trading. If you don’t care about losing it then your trading behaviour will be reflected more accurately in your results. If you are worrying over every penny, psychology will definitely hinder and even destroy your trading performance!
What Are the Costs of Running a Trading Book?
As regards expenditure, very little actually, when you put that in relation to the potential returns you could make trading.
Probably the biggest ongoing fixed cost would be the cost of your charting package. I would always advise you to invest in a decent charting package – this can make a huge difference to your ability to succeed as a trader, especially if you want to do real-time/intraday trading. The price of these can vary between £25 per month and £1,000 per month depending on what package you go for. This will be determined by your trading plan.
There’s also the cost of coming on any of our training courses or investing in individual mentoring with us, if that’s something that you wanted to do. Other than that, if you have a PC and access to the internet, then the barriers to entry are pretty low.
Whilst trading, your ongoing variable costs will revolve around broker fees, spreads and margins – these are costs which will very much depend on the size of your trades and how often you are trading. They are deducted from the profits you make, so finding the best broker in order to optimise your trading costs, is very useful in improving your overall net gains.
However, the biggest cost I would argue (and again this will be decided from your trading plan) is in fact ‘time’. Trading is not a 5 minute a day hobby like many will tell you. I don’t care what they say, even if you buy a ‘black box’ off- the-shelf trading system, you’re still going to have to invest a considerable amount of your own personal time in to understanding and applying it. It has to fit into your lifestyle and if you are a full time employee, with four children who likes to play 2 rounds of golf a week and then hit the pub Thursday, Friday and Saturday, then think again!
(By the way, I advise you not to go down the ‘black box’ route as I will discuss in future posts)
So How Much Time Do I Need to Put Aside Each Day to Trade?
I will answer this question with a question….How much time do you have?
This is an important question for many reasons and will have a major bearing on your whole trading career and what approach you take. In my experience “Life will try its best to mess up your trading!” So you had better be really sure about what you want to achieve and that you can realistically commit to that objective. Why is this important?
- It will determine your chances of reaching your financial objectives.
- It will determine what trading strategies to apply.
- It will decipher your motives for trading in the first place.
- It will help you to put a trading plan together.
Ask yourself, how much time Monday to Friday could you give 100% to trading?
Ask yourself, do you want to make trading: (the below all have a bearing on the answer)
- A full time job?
- Just a bit of fun?
- A tool to make some extra cash e.g. for holidays / cars?
- Provide for your retirement?
- A long term investment tool?
Ask yourself, will your commitments realistically not get in the way of your trading objectives?
Should I Start Trading Using a Demo Account First?
Warning! Demo accounts can damage your trading performance! A possible controversial statement I know. But here is why I think you shouldn’t bother with Demo accounts. It’s all down to psychology. I do believe a demo account is good for getting a feel for how you execute a trade, but that’s about it!
Here is my rule: “Trading on a ‘demo’ basis creates BAD habits and will seriously impact your trading results!”
So here is the scenario. You get comfortable trading on demo for 6 months, you show some good returns, you get lucky as the markets have been up and strong – it all looks easy!! This is how I’d break that down:
- You’ve wasted 6 months of having actual money in your pocket.
- Markets change – what worked then, may not next time when you are ‘live’. Handling failure is huge – you won’t follow it as closely as you should to develop your strategies.
- If you’ve got nothing to lose then there is no pressure. It simply isn’t real, and I can tell you from years of experience, you really need it to be real to make it work! I remember my first day on a trading desk. For months I’d planned what I was going to do, but when it really came to pulling the trigger there were so many more factors that came into play! It really does become psychological – what if I lose? Make a mistake? Fear suddenly takes hold and you become a rabbit in the headlights, over trading or just not able to pull the trigger at all.
Here is a golf analogy. You hit the driving range / practice putting green. Drives are going three hundred yards, every putt is sinking – this is easy! You put yourself into the local competition. Everyone is in the clubhouse watching your first drive – you fluff it. You three putt from 5 feet. How is this possible? It was so easy on the practice green!? PRESSURE and PSYCHOLOGY! Without practising for real under the spotlight, it doesn’t matter how good you could be, if you can’t perform when it matters!
You learn a lot quicker by doing it for real. It is the only way to learn. It is the way I learnt. Thrown in at the deep end!
My suggestion would be that starting trading at a smaller size is better than trading a demo account. In my opinion, demo account trading is bad for your health and gives you a false sense of security.
What Are the Key Areas of Trading That I Will Have to Learn?
You must keep trading simple. It can be broken down into 5 key areas that you need to master to stand any chance of success and to seriously enhance your own personal performance:
- Trading Techniques
- Risk Management
- Trade Management
-Strategy design and implementation
-Goals, Objectives, Rules etc
Can I Start Trading Straight Away?
Of course you can! I hope this article has helped to answer many of your burning questions in a simple and straightforward way, giving you all the essential information you need to get started trading. To start trading now, click here:
If you are still not sure whether trading is for you, have a read through our other blog posts for more detailed information or join us on one of our courses, where you can learn the fundamentals of trading alongside other fellow traders.