(Part 3 of ten-part series on Financial Truths)

 

Section 1: Why You Must Not Trade Until You Can Set Aside $15,000

Section 2: Constructing a Personal Balance Sheet

Section 3: Figuring Out How Much You Can Afford to Risk

Section 4: Your Road to $15K

Section 5: How to Develop Your Trading Skills While on the Road to $15K

 

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Section 1: Why You Must Not Trade Until You Can Set Aside $15,000

  • It’s way too tempting to use leverage
    • Many exchanges require as little as $2,000 to set up a new margin account.
    • Margin debt carries an interest rate almost as high as credit card debt.  E-Trade: 9.25% on balances below $10,000
    • Buying options?  This is another form of leverage, and often even more expensive than margin.  With more capital, you can sell options instead.
    • Futures have MASSIVE leverage: e.g. 18-to-1 for crude oil on the CME – you’ll blow up your account unless you’ve got a long track record of successful trading, either in a real money or paper account
  • Commissions and fees will eat you alive

 

Section 2: Constructing a Personal Balance Sheet

  • Assets
    • Bank accounts, investments, retirement accounts, businesses, home equity, vehicles, other property, etc.
    • Contra-Assets (reduction to assets): Example – taxes on tax-deferred retirement accounts, like 401(k) and IRA accounts.  Could be as much as 30% or more depending on tax rates when you retire
  • Liabilities
    • Home mortgage, auto loans, student loans, credit card debt, business debt, medical debt, personal loans, etc.
  • Net Worth = Assets – Liabilities

 

Section 3: Figuring Out How Much You Can Afford to Risk

  • Establish an emergency fund
    • Think of a scenario that would be devastating for you financially (but nothing far-fetched/crazy like the end of the world!).  For example, being out of work for 6 months and your family facing $3,000 of extra medical bills during the same time period
    • Account for ALL costs you’d face, including staying current on debt
  • Don’t plan to rely on outside sources of funding like credit cards, cash advances, personal loans, etc.
  • Consider going further – perhaps a 12-month emergency fund, or keeping a year’s worth of mortgage payments or rent set aside on top of a 6-month emergency fund
  • Keep all emergency funds safely invested in cash-equivalents
  • If you’ve got $15K left over to deposit, then go forward.  But be sure to establish a risk management plan and limits in advance.  I introduced this topic in Episode 2.
    • What is a “significant loss” to you?  10%?  20%?  Don’t mind if you lose it all?
    • Over what timeframe?
    • How often can you accept this loss?  1 in 10, 20, 30 years?  Or more often?  To determine this, imagine that loss occurred just now.  Think about what you would do.  A big reaction, like selling lots of assets or closing an account – or small reaction, just watch things a little more closely?

 

Section 4: Your Road to $15K

 

Section 5: How to Develop Your Trading Skills While on the Road to $15K

  • Absorb knowledge
  • Follow the financial news for 15 minutes a day: Start with Reuters
  • “Paper trade”, but pretend the numbers are real – celebrate wins, feel the pain of losses

 

Intro music by audionautix.com

Find more episodes of the Torpedo Trading Podcast at this link