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How to Know if Trading is Right for You



Key points covered in this article
Should you trade?
Ability
Running the numbers
Active or passive mindset



Should you trade?

Should you trade? It is a simple question, but not easy to answer. There are many factors to consider but the most fundamental factors center around your ability and willingness to trade. If you answered ‘yes’ to the first 2 questions you can start to consider how much capital you are prepared to risk and whether you prefer an active or passive approach in your journey of wealth accumulation.

Ability


Ability - The first question you should ask yourself is whether you have the ability to trade. In other words, do you have the asset base? Senior analyst, Tyler Yell compares this to a runner’s aerobic base in preparation for a marathon. A stronger aerobic base, means you can run more miles without body breakdown which leads to a more successful race despite the inevitable developments on race day.
Without an appropriate aerobic base, you're not really able to run the marathon. You may be willing, but that has little to do with whether or not you can cross the finish line.



Running the numbers

If you are still reading this, you probably have a degree of ability and the willingness to trade, so we will delve a little further. As a rule of thumb, traders should be looking to set aside 10% of their overall investment portfolio but only if you are able to live without this amount. This fits into the trader psychology as you will be less emotional when trading with capital that you can afford to lose, even though this is not the plan.

When you need the capital you are trading with, you tend to be greedy, but not in a good, Gordon Gekko kind of way. Rather, you become greedy to the point where you're unable to take a loss. Greed breeds fear as it often arises from inability or unwillingness (there are those two words again) to take a loss, causing you to hold on to a loser longer than you should.


Active or passive mindset



Another point, second to ability is whether you want to be active or passive in your journey of wealth accumulation.
Trading is a decisively active way to grow your capital. Typically, you'll become fond of specific markets or asset classes followed by a form of analysis and risk management that you'll use to hopefully take you to the promised land.
Either way, whether you're a day trader or swing trader, you'll likely find yourself eating, breathing, & dreaming about markets. That's ok. Your love for the markets doesn't give you an edge other than increasing the likeliness that you'll stick around to build a strategy that works for you.
If you prefer passive investments like ETFs, then you're likely not reading this, but if you are, trading probably isn’t for you just yet. Passive investors celebrate in bull market but can find themselves wanting more when volatility spikes. It's fair to say that low costs to investing are an 'edge', but depending on the ETF at play, a broad breakdown could cause advocates of passive investing to look for ways to become more active in determining where they should be investing.



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