How to Know When You're Ready to Trade Real Money
I was asked the question over the weekend how one knows he or she is ready to make the move to trading for real. I posted a response to my trading education blog earlier this week, and am posting it here now for your reading pleasure too.
This, I'm sure, is a question which goes through the mind of just about anyone who starts off learning about trading and does their recommended work through demo trading. At some point you do have to make the jump to real money trading. It's just a question of when.
As you may be aware, I'm a major proponent of getting one's feet wet in real trading as early in one's developmental process as possible (see Trade real money, not paper money). I'm not saying one should necessarily just jump into to live trading right away, just that some exposure early on can accelerate the learning process.
Today's question, though, is more along the lines of "How do I know when I've learned what I need to know?" Notice I didn't imply or suggest that the individual has learned everything there is to know. That's not an obtainable goal, and anyone attempting to reach it before they start trading will never begin. I've been in the markets for about 20 years now, and while I know more about them than the average person, I will never know everything. In fact, seemingly on a daily basis I am reminded that there's loads of stuff I know nothing about. It's a great way to stay humble. :-)
But let me return to the basic thrust of the question. You are ready to trade live when you have a thoroughly tested trading system or methodology (whatever you want to call it) that provides you the edge you need to produce long-run results and you are able to stick to it. Believe me, it's the latter part which is the harder one in most cases.
I hear this
@dave I hear this all the time.
@john - do you have that study?
Momentum buying can beat the stock market
Here's a link to that article:
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/19/ccinv1...
Behind the Times
Typical academic response. There was actually a recent article about a study done by the London Business School that momentum trading did actually produce above market rate returns.
Funny you say
Funny you say this as I just come from a class this evening where the professor says there is no such thing as an edge over the long term- is he full of it?
Professors...
Learn the theory and then learn on the job. Forget that advice. Those us the that follow readings on Cresmont Research's John Mauldin (http://www.crestmontresearch.com/) can at least appreciate what you professor is trying to say. However if you give credence to his claim you will not be doing yourself any favors. The idea that you can gain an edge by being disciplined and having a strategy is the only way to achieve your investment goals. You may not gain a long term "edge" over market, but you gain a long term edge in achieving your investment goals and that is what is most important.