Excerpt from: Day trading newsletter Issue No. 014
Using the market to generate income - Part Two
<< Part One
The important lesson to learn from this (gaining experience is nothing more than learning from your mistakes and persisting) is that a trade and an investment are two entirely different entities. A common, but potentially lethal mistake is to consider a trade that has gone bad on you an "investment". This is because we enter trades (if we know what we are doing) for entirely different reasons than we enter investments. They are very different for many different reasons and it is very important that we all accept that in order to advance our skills and effectiveness. Whenever you enter a trade, you must have a stop in place. You need to determine your stop before you even enter the trade and it should be chosen based on valid support and resistance. When this rule alone is followed correctly, you will avoid the temptation to allow a bad trade to become a bad investment.
You mentioned your desire to generate "income" from the markets through active trading. First, of course it is possible, but it is not a good idea to rush the learning process. First off, you should really forget about trading options until you have experienced a good amount of successtrading stocks. When traded correctly, stocks offer much less risk than options. Also, the "fear" that you mentioned can easily cause you to make emotional mistakes and these always result in loss of capital. If you really want to learn to trade successfully and consistently, then you needto build a strong foundation and protect yourself from the devastating losses that come with inexperience and can take you out of the "game" before you have a chance to learn what you need to succeed.
The best way to regain some confidence is simply through practice and determination. Begin to "paper trade" DAILY, and if you can, download a free day trading simulator.
Just be sure to trade "honestly" (trading as though you were actually trading your own real cash) and always determine your stops before entering a trade. There are many facets to successful trading.
To address your % of cash question - never risk morethan 1/2 to 2% of your trading capital on any one trade and no, I would not suggest doing this with options quite yet. Stick with stocks until you have learned enough to accept the added risk that comes with option trading. If you learn to trade properly there will be plenty of time to trade options, but if you do not, you WILL be kicked out of the game before giving your self the chance to succeed.
Also, feel free to ask me more questions here. Take care James and good luck!