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Practical Notes for Trading


Don’t Trade Unless You Have Enough Capital

How much does it take to start trading? The answer lies mostly in the effects of commission.

Consider the following: Let’s say popular discount brokerage firms charge $11 per trade. That means to buy and sell a stock costs you $22.  Opening a $1500 account means you’ll automatically lose about 1.5% of your account every time you trade a stock. If you make six trades, your account will already be down about 10%. Hopefully this example illustrates that if your account size is too small, you’re doomed to fail because of commissions. It’s like boxing with one arm tied behind your back.  That’s why it’s important to find  discount brokerage firms with low enough commission to make you successful.

Be Flexible Enough to Go Long or Short

It’s important that you remain unbiased in your assessment of charts so that you’re flexible enough to go where the opportunity is. For example, many people are scared of shorting stocks because they’re told they could lose more than they put in. That’s technically true, but it’s misleading. In order for you to lose more than you put in, the stock you shorted would have to go up more than 100%. Remember our rule about cutting losses? You should never let losses get that large. If you diligently cut your losses, trade only high-volume stocks and don’t put too much of your account into one position, then shorting is no more risky than longing a stock.  Almost all discount brokerage firms allow you to short stock with a margin account.

Only Trade Liquid Instruments

A liquid stock, for example, is a stock that trades many shares a day. If you trade illiquid stocks, it’s going to cost you. Without going into the mechanics of how a stock exchange works, suffice it to say illiquid stocks cost you money right off the bat, just like commissions do. Illiquid stocks also tend to gap up and down erratically, leaving you without the chance to exit at a reasonable stop-loss point. If you trade stocks, make sure whatever you buy or sell trades at least a few hundred thousand shares a day; anything less liquid could cost you.  

Partnering with good discount brokerage firms and following the preceding advice will set you up for success.


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