Three Trading Portfolio Rules

The very first step in entering the world of trading is to put aside some monies with which you will use ONLY for trading.This is the just the first step and it’s one where many new students of trading already make an error. The reason: They don’t know that there is a proper procedure for setting aside money for this purpose.

Here are three rules to setting aside money to do any trading, whether your intention is to trade options, futures, currencies or stock:

1. Be sure it’s DISCRETIONARY MONEY. This means that you have already achieved enough success in your financial life that you have reached a point of a degree of stability. This means, for example, that the basic needs of you and your family are taken care of, as well as some enjoyment features. Then, over and above what you need to maintain your lifestyle, you have managed to set aside a ‘nest egg’ that is considered ‘extra’ money, money that you don’t need to live on.

‘Discretionary’ refers to the fact that you can do whatever you wish with that money. WHAT THIS REALLY MEANS, HOWEVER, IS THAT IT’S MONEY THAT YOU COULD AFFORD TO TOTALLY LOSE! By ‘losing’, I refer to ALL of it! Every last dime of it! Gone! Zip! (Am I making myself clear?)

Not only must the possibility of losing it be considered, but there are other factors, e.g., will losing it cause changes in your lifestyle, marital pressures or loss of some future dream, e.g., the college expenses of your child?

What I recommend is that every person even THINKING of learning to trade, sit down with his accountant and go over his ENTIRE NET WORTH situation to ensure that this money is, in fact, discretionary.

2. Be sure it’s NOT UNDER PRESSURE. This refers to the fact that some students of trading have made the mistake of BORROWING money with which to trade. Not only does that money have to be paid back, but interest must be paid on it AND all of this done within a certain TIME FRAME. This puts, as many students find out the hard way, far too much pressure on you to start making a PROFIT before you’ve fully grasped the PROCESS of trading. (This is referred to in my previous post.)

Another way that this money can be under pressure is if it MUST start making money right away, e.g., to pay incoming bills. This also is a death knell to the trader that needs both TIME and LOSSES in his portfolio in order to learn how to trade.

3. While there is no set SIZE of portfolio that is required to trade, keep in mind that larger sizes allow for more mistakes to be made before ‘catching on’ to how to trade profitably. Also, the laws are set up to give more ‘breaks’ to those with larger portfolios. Day trading requires at least $25,000. Portfolio margin requirements are much less stringent when one has at least $100,000. There are more benefits when one has at least $250,000 with which to trade, etc.

In my next post, I’ll address the question of overall trading rules on one’s portfolio.