Making the Transition from Investor to Trader

Mediocre returns in 2007 are forcing many investors to look at the trading game as an alternative way to play the financial markets. This is a common phenomenon during periods of market weakness because trading offers a methodology to profit from the short side, as well as the long side. But there are many pitfalls in making the transition. Let's take a look at what to expect and how to best avoid them.

Seasoned individuals with proven results as long-term investors tend to perform very well as short-term traders. It makes sense because these folks have already learned the discipline and patience required make their strategies work and have the deep pockets needed to get through the steep learning curve.

How much capital will you need to open your first trading account ? While many brokers accept new accounts at the $5,000 level, realistically, anything less than $35,000 adds considerable survival risk . The reason: the SEC's pattern day trading rule limits your ability to execute intraday positions when your account drops below $25,000.

And it doesn't matter that you have no intentions of day trading. Newer traders find themselves in many bad positions that need to be exited immediately. If your account falls under the magic number, this sinister rule can kick into gear if you don't wait until the next trading day to get out. That can cost a fortune in these volatile markets.

In any case, expect months of frustration before you make consistent money in the trading game. The market landscape is a complex animal filled with thousands of predators ready to take advantage of every mistake you make as your trading skills evolve. With this in mind, trade small until your results demand bigger risk taking.

The markets are filled with undercapitalized newbies hoping to turn their small stake into a vast fortune. Often these folks are straight out of college and trying to avoid the rat race by trading their way to financial freedom. Although they're saddled with considerable debt and entry-level income, they scrape together a few dollars for their new endeavor.