An old Wall Street joke asks how to become worth a million dollars through trading stock. The answer is to start with $5 million. While professional stock traders can make significant profits, it should be remembered that in any stock at any time someone is losing money. While it seems logical that the greatest risks pay the greatest returns, those traders who without fail follow a conservative system of trading tend to be the winners while the "got a hunch, buy a bunch" type of traders tend to be the losers.

The Marketplace

The more you know about how the marketplace operates, the better your trading decisions will be because trading is not only the art of knowing what to buy and when to sell; it is also the art of knowing how to recover from a disastrous situation. You should study financial analysis of company financial statements, fundamental analysis of company operations and industry position, economic analysis so you understand the economic forces and how different companies and different securities markets react and technical analysis of historical and real time trading charts. Whether or not you believe in astrology, you should also consider learning financial astrology because many of the top traders, market analysts and portfolio managers are master astrologers. On Wall Street, any tool that works is utilized.

Trading Strategy

Use your learned techniques and tools to formulate a set of trading rules for yourself. Set out your assumptions on paper then write down your rules. Your assumptions will be "if-then" statements such as "If the Federal Reserve raises interest rates then financing becomes more expensive for corporations. If financing becomes more expensive, then reported earnings will be disappointing." Post that paper where you cannot avoid seeing it as you trade and right next to it put your trading rules. Your rules should clearly state when circumstances indicate you should put on a position and when you must take off a position. Your rules should also include maximum position size as a percentage of your portfolio. For example: "No position may exceed 10 percent of the total portfolio. Cash must always be 25 percent of the total portfolio." Your cash position is sacrosanct because it gives you the money you will need to give yourself a second chance if necessary. Never put your entire portfolio behind one trading idea. Survival depends on conservative trading.

Test Run

Before you put your money at risk, test your strategy using one of the many online fantasy stock markets. Practice fantasy trading till you develop a system that works for 80 percent of your trades. You should also conduct fantasy trading until your reactions are automatic. You may find it frustrating to rack up big profits in fantasy trading when you feel you could be making real money instead, but you will find it is much easier to make profits when you are fantasy trading than when you are using your own money. Expect to fantasy trade for six months before trading real money. Real Wall Street traders apprentice for approximately two years before they are allowed to trade even small positions.

Start Conservatively

Put your fantasy trading period to even better use by saving money to fund your trading account. You should never use money you cannot afford to lose. When you are ready to trade, start out with half positions and gradually move into trading full positions as you get more comfortable and can depend on successful trading at least 80 percent of the time. Set aside your profits until they equal your original trading fund. This will provide you even more survival protection in case of unforeseen events that cause a market collapse. Do not be impatient. Professional traders are nothing like the crazy characters portrayed in the movies; they are more like professional assassins in their obsessive attention to detail and back up strategies. Professional traders are actually very serious and are often very dull people to be around.

Source:

Investor Home: Do Day Traders Make Money?

North American Securities Administrators Association, "NASAA Day Trading Report"

Resource:

Virtual Stock Exchange from MarketWatch