You start trading: is your quest for “financial freedom” costing you too much money?
“You have to speculate to accumulate.”
I don’t know who first said that, but I expect it was someone who’d never tried typing “forex profits” into Google.
Sure, you need money to make money – but too many investors find themselves paying out hand over fist, when all they wanted to do was to give their savings a boost.
Sound familiar?
So, to start trading and to continue to trade, just how much should it cost?
We know that there will be some charges along the way, plus losing trades and periods of drawdown, but how can we manage these costs and still come out with a profit at the end of the day?
There’s no doubt that trading the markets has the power to bring you and your family financial freedom, but …
… a great many traders I speak to are disheartened by repeatedly forking out on courses and products that “don’t work”, or by losing runs that they “weren’t expecting”.
In fact, the majority of people who take up trading, become so disillusioned that they end up throwing in the towel completely.
Who’s to blame for this?
And what can we do to prevent it from happening to us?
How much money do you need to get started?
Many traders ask me this question. Unfortunately, it isn’t a simple one to answer.
It’s true that the more money you have to get started with, the greater your chance of success.
Most businesses fail due to a lack of funds, so a trader with a large balance is likely to ride the twists and turns of the markets more comfortably.
However, I wouldn’t be in this game if trading was just a pastime of the wealthy – I certainly didn’t have a large fund when I started out.
I firmly believe that there is no reason that you shouldn’t be able to succeed with a very modest starting fund – I’m talking about just a few hundred pounds.
But, as with most areas of life – if you have less money than the next guy, you have to work that bit harder …
There are two serious pitfalls that traders with smaller funds fall into. If you can avoid these, you’ll have safely navigated your first trading hurdles …
1. Traders with small funds often stake too high. If you only have £500 in your trading fund, and are risking 2% on each trade, you can only risk £10.00 on a trade. That means that if your stop loss is 20 pips from your open price, you should only be staking at £0.50/pip.
However, what often happens when traders only have a modest fund is that they want to increase that fund quickly, so they’ll start risking 5% or 10% on trades – and a handful of losses quickly makes a nasty dent in their fund.
Losing money is easy – making it back is considerably harder.
If you’re risking 10% of your £500 fund on a trade, you could have destroyed almost half of your trading fund in a run of 6 losing trades. It’s really surprisingly easy to lose 50% of your pot, down to £250 – but to make that money back, you don’t need to make 50% – you actually need to make 100% profit. Which is a big ask.
2. The other pitfall of traders with small funds is to not take their trading seriously enough. Traders think that their position is only risking £10, so they don’t work hard enough on their trading – bad habits slip in, and they start breaking their own rules, like moving stop losses, or trying to eek out extra points.
The watch words are – be patient … and don’t get greedy.
If you need a reality check – take a look at how much that £500 can earn you in a high-interest bank account. The best I could find was about £20 a year – which won’t even match inflation.
The price of a good education
Okay, so we’ve got our modest trading fund … and realistic expectations of how fast we can grow that fund … what next?
The next cost many traders incur is education …
And here, the sky is the limit. You can choose to spend thousands of pounds on classes … mentors … and seminars…
If you get a good one, you could find that you’re off to a perfect start, by-passing the most common mistakes that traders make, and having a true helping hand on the way to being a successful trader …
If you get a bad one, you’ll be wasting your precious investment cash.
But the problem that novice traders often run into, is that the top of the range mentorships often come with hefty price tags – and you don’t want (and can’t afford) a huge outlay when you’re just starting out.
So, the option that many new traders go for is to teach themselves …
You can pick up books and training DVDs relatively cheaply, and buy off-the-shelf trading systems and strategies.
Of course, there’s also plenty of free content available on the internet, and spread-bet companies offer free seminars and online training.
My number one for free educational forex content is www.babypips.com, but I’d be really interested to hear back from you about where you’ve found useful educational material for free.
And once you get up to speed, you can start develop your own trading ideas and strategies.
And remember – don’t buy trading products that don’t come with full money-back guarantees. That way, if you don’t think that a course or strategy will pay for itself – you have recourse.
What I want to emphasise here is that – provided you can be disciplined and focused – there’s no need to incur a lot of costs in starting to trade.
– Start small, but start seriously.
– Manage your risk and never stake too high – the less money you have in your fund, the less you can afford to lose.
– Get as much free content as you can.
In the next seven days …
After months of hanging on, has the euro finally met its demise at the hands of an anonymous housemaid in an upmarket New York hotel?
The resignation of Dominique Strauss-Kahn marks the beginning of a grab for his job. And a realization among Eurozone nations of just how much Strauss-Kahn has done to save the beleaguered currency.
If his successor is not European, the future of the currency will be on shaky ground, so we can expect to see some twists and turns in the fortunes of the euro as the tussle for this top job plays out.
Next week kicks off with Eurozone data, in the form of flash purchasing managers’ surveys on Monday, and New industrial orders on Tuesday.
For the UK, we’ve public sector net borrowing numbers on Tuesday, revised GDP figures on Wednesday, and the Nationwide house price index on Thursday.
