Trading vs Investing

Stock trading, unlike investing should not be applied to long term buy and hold investing. It requires the trader to get in and out of any position (on average) about every eight weeks or less, but depending on the actual stock’s price movement that could be anything from two weeks to up to three months.

Whilst you can start trading with as little as US$500, the amounts you can make really only start getting worth it when you use a working fund per trade of around US$10,000.

Most full-time (very active) traders use a working capital fund of between US$50,000 and US$75,000. I would not recommend using any more than US$100,000 for all of your trading.

Trading should not be used to reinvest profits and grow the working capital beyond an optimal trading amount. It would become cumbersome to manage and getting in and out of positions while holding a lot of stock can become problematic.

To me the optimal amount is US$10,000 per individual trade, and keep the stocks I am trading at any one time limited to five. That would require a 5 x $10,000 = $50,000 working capital. This provides me with reasonable month’s income even if one of the trades fail, an ok month if two fail, and a great month if none fail.

I have rarely held more than five as I don’t want to be at my computer more than once or twice a week and I am quite active in managing my positions.

US$10,000 per trade per stock keeps the amount small enough for you to get in and out of a position easily and with only three or four stocks in play at any one time there’s plenty of time for you to enjoy life.
If you are working with amounts in excess of this I strongly recommend you increase the basket of stocks you are playing with rather than the amount you risk per trade.

Use what amount you are comfortable with, starting at the lower end of your tolerances until you get the hang of things and gain in confidence, both in yourself and in the strategy.

This is just one of the tricks you’d learn in the ‘Ten Steps to Profitable Trading’ ebook from Best Trading Strategy.

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