I’m ready to start – I’m a complete beginner
Question from a New Trader:
I am now in a position to start trading but am a complete beginner. I have allocated $20,000 to trade with. Which broker should I use? Do I need to buy software? How do I begin? I am fully employed so have little time.
Answer
These are good questions to consider before contemplating the trading journey – unfortunately not everyone will consider these factors beforehand and will jump straight in. Let’s take a closer look.
Personality
Successful trading is not about picking the first method you stumble upon. We don’t do that when shopping for cars, white goods or other incidentals. We look around at what is available, we assess our situation, our needs and finances. If you have 3 kids and the pet dog, chances are a 2-door coupe isn’t going to cut it – regardless of how much you want it. If you’re 21 and straight out of university, taking delivery of a Porsche 911 would make you look and feel good, but financially it’s not really on the agenda.
The same is true for trading. Personality and circumstances will dictate a suitable strategy. After all, the world’s most profitable strategy is useless if you don’t have the personality or the ability to put it into action. This client has stated that time is of the essence, so clearly scalping FX during the day isn’t possible so he needs to be looking at an end-of-day strategy or even possibly a weekly strategy such as the Weekend Trend Trader.
Also the inquiry has come from a beginner. As such we should start with a simple strategy that doesn’t require any fancy order types or that exposes him to risks that aren’t overly obvious, such as leverage or options that are prone to non-directional exposure such as time decay. In my opinion the goal of the first time trader should be to simply stay afloat. Forget grand illusions of becoming the next George Soros. Don’t focus on profits. Focus instead on correct trading processes, skills and get comfortable with a trading routine. Small steps will build a foundation for success.
Capital & Commissions
The new trader needs to consider commission drag. In this case the client has $20,000 and whilst everyone has to start somewhere a dose of realism is necessary. Many new traders gravitate to short term trading for the excitement of expected high returns, but short term trading has a significant downside – commission drag.
Let’s consider the average trader using a broker such as Commsec at $19.95 per trade, and doing 100 round-turn trades a year (buy and sell). That’s an annual commission cost of $3,990. So on a $20,000 account this trader will need to make 19.95% just to breakeven – impossible! Therefore the trader needs to either allocate more capital to their trading account, change to a discounted broker, or change to a lower trade frequency strategy. The goal should be to keep commission drag below 5%.
Many Australian traders overlook US markets but there are benefits of looking farther afield, especially for people with smaller trading accounts. US brokerage rates can be up to 90% lower than that of regular Australian brokers. Let’s use the example above of the 100 round turns (buys and sells). Using the same number of trades but this time trading US stocks via a US broker such as Interactive Brokers where the cost is $1 per trade. We’ll pay just $200 brokerage in one year, immediately saving us $3,790 and commission drag drops from 19.95% down to just 1%.
Trading is a business. It is your job as the ‘business owner’ to keep costs down. The lower your commission drag the better off you’ll be.
If you are looking for a low-cost Australian broker consider SelfWealth. Commissions are capped at $9.50 and your first ten trades are commission free!
