Surviving Your First Year As A Trader

Your first year as a trader marks a critical period that sets the odds for long-term success or failure in the financial markets. It’s a time for exploration and experimentation, in which you test new ideas with real money, often with unpleasant results. It’s also the time to build a strong foundation for powerful skills and techniques that last a lifetime.

Cut down the learning curve and improve your odds for survival by addressing key aspects of the trading game before entering your first position. Then, once you’ve taken actual risk, apply a second set of imperatives that will protect core capital while you work through the psychological and logistical challenges created by your new exposure.

Build adequate capitalization before making your first trade. For US equity exchanges, you’ll need at least $35,000 to steer clear of the SEC pattern day trading rule, which will lock your account if a) equity falls below $25,000 and b) you open and close more than four positions on the same day over a five-day period. The $10,000 above the minimum is required because serious drawdowns are likely as you learn how to play the game. (See also Day Trading Rules for Rookies: Don't Play It by Ear.)

You may have no interest in day trading, but new positions can go badly in a hurry, hitting stop losses or exceeding your risk tolerance and forcing you out of the market. This can easily happen multiple times in a typical trading week, exposing your brokerage account to the Draconian pattern day trading rule put into place in 2001, in reaction to horror stories about day trading during the Net bubble. Although antiquated compared to multiple competitive venues, the SEC has chosen to keep it in place into the modern electronic environment. 

Build a trading plan that outlines your market approach, strategies, goals, and risk management techniques. Add to this working paper after getting your feet wet, crossing out what doesn’t work while adding details that reflect your growing experience. Start a journal that records your market observations and how they impact your evolving plan. Save critical adjustments for the weekend, when windfall profits and unexpected losses won’t blind you to required changes in strategy, holding period, or stop placement. See 4 Key Elements To Create A Successful Trading Plan for help on building the trading plan.

Your trading edge denotes a technique, observation, or approach that creates a cash advantage over other market players. It’s tough to create a long-lasting edge before building a history of winners and losers, but you can take your first steps on the journey before entering your first trade.  Start by reading Market Wizards and The New Market Wizards by Jack D. Schwager. This will expose you to a collection of brilliant individuals who have succeeded in the financial markets. 

Don’t try to copy their techniques because they’re unlikely to work well in our algo-driven environment. Instead, focus on their market approach and psychological state of mind. Note how confidence pervades their activities because they’ve shed their emotional baggage and are fully engaged with their trading plans, always looking to the numbers for guidance rather getting than tossed around by the latest bull or bear impulse. See The Vital Importance Of Defining Your Trading Edge for help on defining trading edge.

Limit your exposure to 100 share lots for equities, single mini-contracts for futures, and under $25,000 for currencies. Place physical stop losses if you can’t manage your positions during the market day and, if you’re watching in real time, write down magic numbers that will force you to exit if hit. Start with a single position in a single market and see how much mental and psychic energy is required to manage those trades. Add to exposure slowly, always checking to see if your emotions can handle the increased risk.

Watch how broad influences like major indices and economic reports impact pricing for your positions. Review activity and results nightly, taking notes about the interactions while adjusting stops to account for changes in conditions. Save big strategic adjustments for the weekend, even if your positions are performing poorly. Instead, manage risk with pure dollar exposure, keeping that number under one-third of the total account size. Forget about applying margin during your first year, understanding it’s an advanced tool that requires significant risk management skills.

Keep detailed records of all trades and outcomes, building performance statistics as you proceed. You’ll be changing strategies and traded instruments frequently in the first year, keeping what works and dumping what doesn’t. Don’t rely on feelings to curate this important information. Instead, focus on winning and losing percentages for each approach, noting whether or not exits were taken when required and if stops were placed in the right locations.

Control costs aggressively in your first year. Do you really need that expensive charting program, or will an inexpensive web application do the trick? Make sure your broker matches your emerging market approach. Many new traders have invested for years through discount brokers that may not be suitable for their new hobby. Fortunately, the majority now serve the trading community well, with competitive applications that include free real-time quotes and charts. See Lowering Costs In Your First Year Of Trading for help on controlling costs.

Survive your first year as a trader with a systematic approach that builds adequate capital, outlines a solid trading plan, and executes the first elements of a risk-based market strategy.