It’s probably not a surprise to you that your finance goals should change as you get older. A 20 something should be allocating their investing money in a very different manner than a 50 something should be. With this in mind, how does your short term trading play into your overall finance goals?
This is a great question, and it’s something that all traders should be considering. There is a lot to gain from trading, but if it’s not approached correctly, then you could be setting yourself up for failure—which defeats the point of trading in the first place.
As a general rule, the younger you are, the more risk you can afford to take. This is the method that the best money managers in the world use, and therefore, you should be attempting to duplicate the strategy, too. The closer to retirement you are, the less risk you can afford to take. This mindset should be kept in mind as you start thinking about your overall trading strategy.
More important than all of this is knowing that before you start trading—whether it be day trading stocks, commodities, Forex, or binary options—you should realize that there’s a decent chance that all of this money could be lost. Trading is high risk, and you should never trade with money that needs to be used in other areas. Trading, then, is a part of a larger overall portfolio, and not a replacement for thorough planning. This is true if you are 55 and thinking about retiring soon, and it’s true if you are 20 and about to graduate from college. You need to trade with money that is specifically set aside for trading. You can add more here as you grow your wealth elsewhere, but trading money should be reserved for trading, and it should be something that you are prepared to keep in your trading account for a long period of time. This means years, not weeks. Emergencies may pop up, and in that case, your trading money can be used to help, but if at all possible, this should be avoided.
Now that we’ve cleared that up, within your actual trading regimen there should be very little difference between how a 20 something trades and how a 50 something trades. In other words, an observer from the outside shouldn’t be able to tell how old you are by how you trade. The differences should take place outside of your trading—they should occur within your investing and how you’ve allocated the safety of your investments with bonds, stocks, funds, and so on. However, if you are truly concerned about retirement (and you should be), the percentage of your trading/investing cash that you’ve set aside specifically for the higher risk, short term trading, that you will do should decrease as you age. You can still trade as you get close to retirement, but it should be less oriented toward wealth building, and more of a hobby. A successful trader will generate income either way, and that’s great, but your priorities should be on safety now.
Hopefully, you have positioned your finances in a way that retirement planning is not an overwhelming thought for you, and by becoming a great trader at a younger age, you can make this a reality. But, if you come to trading later in life, these thoughts should help guide your process as you come up with a long term strategy to success. At the very least, this should give you a basic blueprint of what you should be focusing on and how you should proceed.