If you have no prior experience in investing and finance management, you might be surprised by the enormous amount of learning needed in order to learn how to trade or invest. One of the most important things you need to grasp is a solid understanding of your own trading personality, investment philosophy and objective. Knowing these things will help you determine why you trade, how you trade and what you trade. It will also insure that your trading does not interfere with your lifestyle and general well being, which can help achieve better trading results in return. This chapter will take a deep dive in discovering a trading style that is customized to your personal requirement.
When evaluating your trading style, there are usually a few main factors to consider and we’ll go through each one of them carefully.
1. Risk Adverseness – Risk adverseness essentially refers to how well you are able to take your losses. This concept is different from risk management where you are expected to go into the technicalities of how to control risks. Before you start learning how to trade or invest, you always need to find out what is the amount of money you are comfortable with losing. In other words, how much margin/buffer are you allowing yourself for failure? In reality, nobody goes into a trade or investment, expecting to win 100% of the time. The key to profitability is how you react to losses and bounce back even stronger thereafter. Understanding your appetite for risk will also help you choose the type of instruments to trade, be it ETFs, Forex, Options, Stocks, etc.
2. Time Availability – Do you have a day job? Do you have a family? What kind of lifestyle do you lead? These are some of the questions you have to ask yourself before you begin to trade. Having a hectic lifestyle does not complement an active trading lifestyle. Serious day traders often quit their day job to go full time during market hours, 9am-4pm Eastern Time. Of course, this is not always necessary; there are part time traders who only trade a couple of hours per day and still manage to make a healthy profit. At the end of the day you need to decide what type of trading is most suited for your lifestyle. The last thing you want is for your trading performance to take a beating just because you have no time to trade or because the clock distracts you.
3. Long Term Goals – What are your long-term goals? It could be that you want to retire early, or it could be that you want to supplement your current income. Deciding your long-term goals will be crucial in choosing a viable trading strategy and must be decided early in your journey of learning how to trade.
As you can probably tell, the 3 factors are inter weaved and closely dependent on each other. Carefully consider them before investing your money into the market!