May 03, 2006 at 10:21 am | | Comments 3

Personal Inventory

As we begin this Great Expectations Series, I think it’s important to start out with a look at your own trading resources. At first glance, we think only of money available for trading, but it goes far deeper than that.

All traders can benefit by taking a personal inventory of not just their capital available for trading, but their time, their personality, and their tolerance for risk. Even veteran traders are wise to periodically check their situation to confirm that their current methodology is best for them. After all, it’s difficult to set (or adjust) expectations for yourself unless you’ve examined your resources closely.

When deciding what your objectives will be, a good starting place is to consider the time you have available to devote to trading. Although the act of entering an order only takes seconds, the preparation that goes into locating and managing trades can take significant time. Will you have the entire day to devote to your trading, or more like just a few hours a week to manage your account? These are important questions to ask yourself as you select the timeframe you’ll be operating on.

The next thing to consider is the amount of money you will be trading with, or your ‘risk capital.’ This amount is different for every trader, but it ought to be an amount which is large enough to generate good profits for you, while remaining small enough (initially at least) that if you were to suffer some setbacks it won’t affect your financial well-being extensively. Yes, all losses will be felt, but I am referring to your nest egg. If you’re starting out as a beginning trader, it’s wise not to roll the dice with that big savings account you’ve worked so hard at building for many years. Take a portion of it to use for your trading, and dedicate your time toward learning how to first preserve it (see Goal Number 1), and then how to grow it.

Starting your trading career well-capitalized is crucial, and a secondary income can also help tremendously. A trading stake which is small enough that you’ll have to hit home runs with regularity in order to live off your trading profits is a telltale sign that you’re not ready to go full-time. One common trait among traders who gave themselves an early advantage is starting off financially in a position that enabled them to wait for a little while before their trading profits became their sole source of income. This temporary freedom will give you some peace of mind and the ability to focus on the process of trading while working toward becoming profitable. Other traders who have monthly needs which must be met immediately are starting out with a greater challenge than the guy without that pressure of paying the mortgage out of next month’s trading profits. I can speak from experience on this subject, because when I started my trading career my wife had a job, and that income relieved a lot of pressure I would have otherwise faced.

Take a good, honest look at your personality. I’ve discussed the importance of Trading Your Personality, and I really believe that it’s an important aspect of becoming a successful trader which is often overlooked. A laid-back, patient person isn’t going to make a good scalper. A hyperactive, high-strung, easily bored person won’t make a good swing trader. Ask those who know you best to describe your personality traits. That info will go a long way toward helping you define the type of trader you should be.

Finally, now that you’ve done some personal inventory of your time, money, and personality, let’s talk about your tolerance for risk. I’m not referring to how easily you might lay down that $100 blackjack bet at Bellagio! That’s “fun money.” What about your tolerance for risk in the trading arena? Are you going to be able to put on some trades and accept the fact that at times none of them will work out? It’s a matter of dollar risk, yes, but the ego risk can also be substantial. We all like to be right, but that’s a costly attitude when trading. Are you willing to risk being wrong in the short term in order to develop your skills as a trader so that you may ultimately be able to compound your money many times over in the long run? The risks associated with trading do include substantial risk to your finances, but the other side of the coin includes the untold risks to your ego and decision-making ability. Being wrong in some things can quickly be forgotten, but in trading, your account balance will remind you regularly when you’re wrong. If you’re willing to accept that, then by all means don’t miss Part 2!

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Jeff White
President, The Stock Bandit, Inc.

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