It all looks exciting but I still think I’m missing something

In my opinion you need to have a PLAN for you trading operation. I’m trying to help here by making you think about it though it probably seems like I’m being difficult.

Listed in no particular order:

1. What stocks are you going to trade? Any stock on the ASX? Stocks under 10 cents? Stocks over $1? The top 300 stocks? The top 200? The top 50? The BT margin list? Only industrial stocks? Only mining stocks?

2. How much are you prepared to risk on each trade? 2% of trading capital if you sell at the stop loss? 1%? 5%? Automated stop loss? Manual stop loss?

3. How many different shares will you trade at any one time?

4. What is your criteria to buy a particular stock? Technical analysis? Fundamentals? Dividend yield? Drilling results (mining stocks)? Commodity prices? Changed management? Something else?

5. What is your criteria to exit a trade? Price target achieved? Time? Company project has gone ahead? Drilling results announced? Just raise the stop loss until it gets hit?

That wasn’t intended as a comprehensive list, just a few pointers.

Now, what I’m leading to here is that I think you need a SYSTEM (plan) for trading stocks. And you need to KNOW that it will make a profit over time without ever suffering massive losses that send you broke (since then you’re out of the game and whatever profit you could have made afterwards is irrelevant).

It might be easier to think in terms of something more familiar. Imagine that you have a large dam that you are going to use to supply water. You need two things to occur for it to be sustainable. Firstly, you can’t take more out than flows in or eventually the dam will run dry no matter how large it is. Seccondly, the amount you take out in any given dry period must be less than the dam holds no matter how much “excess” water you normally have otherwise it will run dry. If it runs dry then you’re in BIG trouble because translated to share trading that means you’ve gone broke.

Sounds simple? Same with stocks. You need to make more $ than you lose otherwise your account will become empty. Just like the dam. And you can’t lose so much on any series of trades that your acount runs to empty otherwise you have a BIG problem. Again, it’s the same as the dam.

And if you were going to be building dams then you would want to KNOW how much water flows down the river and how much is going to be used. Just like with share trading I think it’s a lot better if you KNOW that what you are doing works rather than just throwing $ around hoping to make a profit.

This means you need to TEST what you are planning to do in order to see if it works. Testing on paper saves $$$ when you find that what you were planning to do doesn’t actually work as well as you thought it would. Incredibly boring in my opinion, but very worthwhile and saves $$$.

Now all you need to do is come up with a system that meets the criteria… (And note that I didn’t intend this post to be in any way comprehensive. Just explaining a few things that cost me rather a lot to learn the hard way.)