I was still in grade school when I was confronted with the following question; “Would you rather have a million dollars today or a penny doubled every day for 30 days?” Little did I know at the time that a penny doubled every day for 30 days amounts to more than 5 million dollars. Of course, at age 9, I made the wrong choice but I always remembered “the power of compounding,”
This article offers you a simplified example of the system that I use to compound my investment account. And the concept is not of my making. I borrowed it from Warren Buffett who is the most successful stock market investor in the World and Albert Einstein who referred to compounding as; “the greatest mathematical discovery of all time.”
Step 1 – If you don’t already have one, open an online brokerage account with one of the most popular brokerage houses such as; E-Trade, Scottrade, or TD Ameritrade. There are many others but those 3 are among the favorites of most active investors. You can fund your account with less, but I recommend $5000 to start with.
Step 2 – Join one of the stock market mentoring groups on the internet. Make sure they specialize in “swing trading”, have a good reputation, a chat room, and a membership that exceeds 200. (Those members will become friends and will be instrumental in helping you reach your goals). The fee is normally around $100 per month. Treat this as a business expense and DO NOT think that you can do this without a mentoring service because you will be wrong!
Step 3 – Study the educational material that your mentor provides you as though your success depended on it. Because it does!
Step 4 – Paper trade until you feel comfortable risking the money you have in your account. Paper trading gives you great insight on what the “real world” of stock market investing will be like. And keep notes that you can refer to later.
Step 5 – Strive for 5% and no more than 10% wins on each paper trade. 5% requires 20 wins to double your investment and 10% requires 10 wins to double your investment. There are approx 250 trading days in the year and you only need 10 to 20 winning trades to double your account.You will find that if you take your time and let the small wins accumulate, you will be ahead of the game at the end of the year. As you gain experience, you will do even better.
Step 6 – DO NOT DAYTRADE! Swing trading works! Leave day trading for the pros.
Note: Most people with small amounts of money to invest think they need to take big risks. This usually causes them to take big losses. Big losses can devastate your available investment capital along with the desired process of compounding.
On the other hand, when you limit your winning trades to between 5% and 10% you will cut your potential losses considerably as well. The daily alerts provided by your mentor are well researched before they are recommended and will more often than not provide wins of at least 5%. most of the time.
However, they will sometimes go against you. (Always do your own research as well. Do not depend totally on your mentor to do all of the research for you) You can also keep your losses at a minimum with stop losses of 5% (mental or placed with your broker). That way you will need a limited number of “extra wins” over the year to maintain your goal of compounding your account.
Always remember that the market can be fickle. Take advantage of favorable market trends and stay away from unfavorable trends.