It is crucial to determine your trading bugdet before you get into the market. That way, you have a clear financial perspective of what you can and can’t allow yourself to do and make sure that you remain in control of your actions. In this article, we’ll give you some insights that will help you out figuring out your trading budget.
Understand Your Finances
In order to make a clear budget for your trading activities, you need to take a look at your financial situation and for that you need to be financially educated. Financial education is important because it allows you to understand how money works and how to control its inputs and outputs ; in this case income and expenses, assets and liabilities. If you want to assign a part of your income or savings to trading, you need to figure out an amount that will not hurt your overall financial situation and the growth of your net worth. Whether you’re a day trader, a swing trader or a long-term investor, we believe that trading should be seen as another source of income which helps you, along with your other assets, to develop and reach new levels in your financial life.
Once you know how to play with finances and understand the concepts behind money management, it’s time to check your current situation. As we’ve mentioned before, we do not recommend anyone experiencing financial difficulties to get into trading as it will only bring more stress into your life. Don’t get us wrong, there is a lot of money to be made in the financial markets but in order to do so, you need to be in a relax state of mind and in control of your emotions. Surely, that is not the case when you don’t know how you will pay for your bills. Dedicate an amount that you can afford to lose. It can be from your savings or by selling an asset that wasn’t that important. Just understand that you need to pick a number that you can live without and that you might never see on your account again. You never know what will happen in the market and you need to be prepared for every scenarios.
As a general guideline, we believe that putting between 5 to 10% of your net worth into trading should be enough to get in the game and make significant profits without hurting your overall financial situation.
Financial Management & Trading
Allright so now you have a budget on the table and it’s time to trade. We strongly recommend you to practice your skills on a demo account first. This will allow you to get a feel of the market without taking unnecessary risks. This is important if you don’t have enough experience with technical analysis or even don’t understand how your trading platform works. Take the time you need to develop your trading abilities safely and once that is the case, it’s time to go live.
The biggest mistake new traders make when they start their endeavors is getting emotional in the market after a great or poor trade and start adjusting their budget and trading strategy. When you do that, you basically let the market control your decisions. It is a weak way of trading and it will certainly hurt you in the long run. This is why we believe that you should not dedicate more than 3% of your trading budget in one single trade. That way, even a very bad deal won’t prevent you to trade and won’t hurt your overall finances.
Now, there are times when you might need to review your plan or your budget and change a few things especially if you don’t get good results. But you do that when you’re offline, not while you’re trading. In this case, you are the one that’s taking the initiave and the decision to make those adjustments and therefore remain in charge of your actions. If you need to change something in your budget, just apply the same principles we’ve discussed in this article. This will make sure that you keep your trading safe and successful!