Before you dive into any types of trading, I recommend you write down a list of things you need to prepare that will help you in your journey. When I was starting, I learned this along the way and I wish I had them before I made my first trade.
The very first thing you should have on your list is your risk tolerance for each trade. Generally, this is the dollar amount you are willing to risk when the trade goes nowhere. I learned that most traders set this to 1 or 2 percent of your total capital. In my case, I set mine to half of 1 percent.
For the the remainder of our journey, let’s imagine we are managing a portfolio of 30 thousand dollars.
Risk = 0.005 x 30,000 = 150
Everyone has their own preference when it comes to risk tolerance. It generally depends on how much you are willing to risk on each trade. The key is to have consistency and the discipline to follow your own set of rules. Your risk tolerance will also help your order sizing; more on this later.
The next item in your checklist should be to define why are you trading or what are your drivers for making that trade. It can be speculation, income, or hedge. If I have to guess, you want to get into trading primarily for speculation. There’s nothing wrong with that. But it is also important to learn the other ones as well; more on this later as well.
The last item I recommend you prepare is how much position should you make for each trade. This will define how you want to slice your capital for each trade. There’s no clear cut rule for this. It depends on how much diversity you want in your portfolio. You don’t want to end up—or maybe you do—with a portfolio with one position eating up half of your capital. It goes back to how much risk you want to take. This last item is subjective but very important. You need to have a strategy before you start.
So before you send that first order, please prepare your own checklist. You need to have your risk tolerance defined, the reason for the trade, and how much diversity you want in your portfolio.
I wish you luck in your trades. Trend is your friend until it bends.
Note: Not a recommendation. Please consult an investment professional before making investing decisions.