Continued from yesterday...

When you first set up your trading account, a smaller account is actually better. Do not dive head long into trading. I have seen countless cases where a trader comes to me having lost a substantial amount of money in the market before ever meeting or contacting me. Most of the time it comes from investing too much, too quickly and too often. The account size needed to trade successfully and to earn a living vary from trader to trader. It will depend entirely upon your own personality and comfort level with regard to risk. There is no correct amount, although if you wish to day trade equities, you will need enough to qualify under the pattern daytrader rules initiated a few years ago. This tends to mean $25k or more to be on the safe side.

When you get started, you to not need as much to trade with as you will when you move onto trying to earn a living at trading. This is because it is very important to start small. Nearly every “newbie” to the market understands the concept of “paper trading.” This means following along with setups and patterns as they develop in the market to get a feel for the market before actually risking any money in the market. Simulated trading whereby you place a trade, without actually risking any money on the trade is in this same category.

The problem new traders run into when making the switch from paper trading or simulation trading to actual trading is that in each of these cases it's easy to get in and out at the prices you want, when you want them, and with very little emotional attachment to the success or failure of the trade. When actual execution skills and emotions come into the mixture though, the situation suddenly becomes very different. Not only may you not get the fills you want or need, but the thought of winning or losing your own money can take quite a toll on your ability to manage your positions calmly and rationally. Fear, greed, anxiety, elation, and dozens of other emotions that rarely popped up in your paper trading or simulated trading, or did so only mildly, will suddenly take on a whole new meaning.

A rather simple and less stressful means of making the switch to trading is to start very small. For most traders, I recommend risking no more than $20 per trade to begin with. As a result, instead of losing several hundred on a trade, you lose the equivalent of going out to the movies. Actually, if you happen to live in a major metropolis, it's even less. It is important to make it an amount whereby if it ends up being a trade that stops you out, it does not grow on you, making taking a stop something you fear, hence hindering your profits and leading to your mismanaging your trades.

Once you learn to trade consistently on a smaller scale, only then should you begin to increase your share size and risk amount. I would recommend trading successfully at a given risk level for several months before adding to your size and, even then, the increases should be very moderate. Each successive step should be small enough that the stop losses do not overwhelm you. It is very common in trading to take several steps forward and then back again.

Many times I will see traders up their risk too quickly, after a series of wins, whether it be as short as one week's worth or several weeks' worth. Since the market can hold a trend for a number of weeks on end before putting in a larger correction, it is better to wait several months before changing your size. You should also make it a set time amount and not have it based on the account growth. This is because often a strong series of wins is due to a certain market type and invariably traders tend to choose the end of such runs to add to their positions, only to get struck with a series of losses at the larger risk size. One way to help ease the transition is to start adding size to patterns you are the most comfortable with and where you have the most confidence. On trades where you are less certain of the outcome, or patterns you are starting to add to your repertoire, stay at the lower risk level.

The final part is continued tomorrow.

P.S. I'd love to receive feedback from you. Please leave a comment or discuss the article by clicking on "Make a comment on this article" below.

Toni Hansen is President and Co-founder of the Bastiat Group, Inc., and runs the popular Trading From Main Street. She can be reached at Toni@tradingfrommainstreet.com.