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Making the Transition from Investor to Trader

02/01/08 - 01:17 PM EST

Alan Farley

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 sell-short side, as well as the long long-position 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 capital will you need to open your first trading account brokerage-account? While many brokers broker accept new accounts at the $5,000 level, realistically, anything less than $35,000 adds considerable survival risk risk. The reason: the SEC's securities-and-exchange-commission-sec pattern day trading day-trader 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 volatility 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 debt and entry-level income, they scrape together a few dollars for their new endeavor.

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At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.

Farley is also the author of The Daily Swing Trade, a premium product that outlines his charts and analysis. Farley has also been featured in Barron's, SmartMoney, Tech Week, Active Trader, MoneyCentral, Technical Investor, Bridge Trader and Online Investor. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product, The Daily Swing Trade, brought to you exclusively by TheStreet.com.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.


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