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Step 1
Educate yourself: Read every book you can on the subject of trading and investing. Attend a few seminars and/or courses on trading. Treat this process as if you were attending your own graduate program in trading stocks. There are hundreds of books on the subject, so it is difficult to know where to start. I recommend beginning by reading books by Van Tharp, Jack Schwager, Alexander Elder and Mark Douglas. Once you read these authors, you will find their recommendations and go from there.
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Step 2
Find system that suits you: One of the most important elements of success in trading is using a system that matches your personality. There is no one system that works best. Warren Buffet always invested on fundamental analysis, buying stocks cheap. William O’Neil used fundamental and technical analysis to buy growth stocks that were already high in price. They were both successful. I used several different systems unsuccessfully before I found one that suited me, and now I have been trading profitably for the past 3 years. During the education step above, you will read about all kinds of different trading methods…as you learn about them, you will begin to find the ones that match your personality and style. This is the true secret to trading successfully.
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Step 3
Test the method: Once you figure out what system works for you, you need to be confident that it works. Learn how to back-test it. Back-testing is looking at historical data and figuring out if it would have worked (meaning, made a profit) in the past. If it did work in the past, it does not guarantee it will work in the future, but you will have confidence that it will be more likely to work in the future. You can buy software, use excel or do it manually. Either way, you should learn how to back test.
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Step 4
Check Your Expectations: If you have $100,000 and think you can quit your job and trade for a living…think again. If you earn 25% returns on that money, you will make $25,000 in the first year. Can you live on $25,000 per year? Can you make 25% every year? Almost no one does…so check your expectations. Keep your job and trade as a part-time job until you are consistent in your performance.
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Step 5
Act like a business: Don’t just buy and sell stocks…act like a business. Set up records. Update your transactions, equity curve, profit and loss statements regularly. Prepare monthly reports of your trading activity and file them in a binder or folder. If you want to trade for a living, you need to act like a business. Even if you are trading in your own brokerage account, make up a business name, like “Smith Trading” or “Little Guy Investment Company.” If you want to be a business, you need to act like a business.
