Stock trading is an entrepreneurial profession that requires you to risk money. To make money, it is worth sticking to a rational, conservative approach to the market. Below are some tips for novice traders who are preparing to plunge headlong into trading — with the main focus on preserving capital and sanity, rather than getting rich quicker.
1. Don't rush to trade
The market will exist tomorrow, next week, next year and next decade. Don't worry that while you're trading on a demo account without real money, you might miss a once-in-a-lifetime move. Opportunities will always be there — you lose nothing by investing your time in education and training.
2. Don't trade for no reason
When you finally start trading, don't trade just because you feel you have to, or out of boredom, or on a whim. Risk your money only when you see evidence supporting the existence of a favorable trading opportunity, and a trading plan that you can use to take advantage of that opportunity.
3. Beware of early success
A scattering of successful trades at the beginning of your career is unlikely to be something unlikely. This is one of those little jokes that the market plays on us - we knock down a few good trades at the very beginning and become convinced that we are brilliant market players.
They say that beginners are lucky, and this applies to trading as well as to everything else, so don't become too overconfident. Many traders who lost money early in their careers are grateful for this lesson — in retrospect — because it gave them a realistic view of the problems and risks of trading.
But even with experience, it is difficult to cope with the ups and downs that come with winning and losing streaks. A trader experiencing a winning streak often unnecessarily increases the size of their trade — just before a big losing trade. And although it is difficult, strive to accept both losses and wins impassively.
4. Work for yourself, think for yourself
“The essence of knowledge is in experience, and the essence of experience is in independence,” this phrase succinctly describes most of what stock trading entails.
Our culture to some extent accustoms us to thinking that there is a product, medicine or service for every problem or need that we can buy and that will allow us to achieve our goals. And although sometimes you really want to rely on someone else's trading ideas, research, recommendations or systems, we have found that for the most part progress occurs when you do the analysis yourself, form your own hypotheses and rely on making your own decisions.
Studying the work of other people is part of a trader's education, and there are many publicly available ideas that become components of a successful trading plan. But there are no shortcuts. Many experienced traders say that even a successful trading system will not work if it is not executed correctly, and the reality is that it is very difficult to fully trust something that is not your own — especially if you do not fully assess all the nuances and do not fully understand why this system works, and when it may fail.
Such confidence in a trading idea usually comes after you do all the work yourself and understand the concept from its very basics. Trade using ideas that you understand and that make sense to you.
5. If something seems too good to be true, it probably is
Whether it's a trading system, “correct” information, or an indicator, anything that promises big money and/or virtually no risk should be avoided. There are no shortcuts in trading — it's a complex business that many highly educated and successful professionals from other fields find beyond their abilities. There is no such thing as a trading strategy that brings success 95% of the time, earns a six-figure sum in a month, and has no risk of loss.
Be skeptical. Find confirmation for every trading idea that interests you, including those that you come up with yourself.
6. Pursue trading ideas that you can research and test
Vague trading ideas — such as “buy when the market is oversold, and sell when you have a decent profit in your hands” — give vague results. The whole focus is on turning market observations and hypotheses into specific rules that you can test on historical price data.
For example, what is meant by the word “oversold”? It can mean anything. An example of an objective rule might be the following: when the market reaches lower lows and lower closing prices for five consecutive days. Whether this definition turns out to be a good buy signal or not is a question that you must answer objectively through research and testing.
7. Keep a trade log and regularly study your performance results
Regardless of their background or approach — investing, short-term trading, technical, quantitative or fundamental analysis — almost all good traders agree that it is extremely useful to keep a log of all your trades and learn from past experience.
8. Be patient
In any case, trading in financial markets is not as easy as it might seem at first. It takes time to master any discipline or profession. Can you expect to become a good musician, doctor or engineer in just one year?
In addition to the natural learning period, trading in the financial markets is also a profession — unlike music, medicine or law — in which you can lose money on any given day, not make it. The “salary” is not guaranteed here.
Success comes with hard work. Some traders work for years without profit before finally getting on their feet. Remember that the markets are not going to run away from you.
9. Have sufficient capital
Under capitalization dooms most new businesses, and trading in the financial markets is no exception. Lack of sufficient money to trade calls into question every other item on this list.
Also, when you start trading, do so at a capital level even more conservative than your projected minimum. For example, if you have determined that you have enough money in your trading account to pursue a particular trading strategy using lots of 500 shares priced below $30 in your trades, try starting with 100 or even 50 shares at a time until you get the hang of your strategy, execution process, brokerage firm, and the psychological challenges associated with risking real money. Then slowly increase the size of your trades.
10. Don't dwell on finding the perfect broker
Choose the middle ground — too low commissions should be alarming, as these may be fraudsters using the guise of trading. So be vigilant. When you gain experience trading with a decent broker with a good reputation, and increase your deposit, you can later choose another broker for your new skills, competencies and trading goals.
11. Always set stops
Moreover, taking into account possible slippage. If there is an opportunity to move the stop to breakeven, take advantage of it, since it always makes sense to insure a potentially profitable transaction against an unexpected loss. Setting a stop always inspires calmness, while a large loss can knock you out of the rut for a long time.
12. Never use the entire deposit for trading
Many professional traders adhere to the rule of using no more than half of the deposit, no matter what happens. Since the market is not immune to sharp movements, and the margin can unexpectedly increase. For a large margin of safety, you cannot trade with all the money that is in the account - this is so obvious and elementary, but very few beginners observe it.
13. Trade with small position sizes and reduce trading frequency
This is the golden rule of capital protection. You can risk no more than 1% of the transaction amount on each transaction. Even 2% is already a lot. Therefore, do not succumb to any emotions and observe this restriction, which is actually your insurance.
14. The amount of the first deposit should be small
This is money that can be spent without prejudice to the family or personal budget. Moreover, this should be money that is neither borrowed nor, God forbid, credit. You can, of course, trade on a demo account for the first time. But real money usually teaches you to realistically assess risks. The joy of growing real profits, not drawn ones, is usually greater.
15. Don't neglect training
This shortens the path many times over and constantly replenishes the piggy bank of skills and tools. Analysis of other people's trades, a lot of analytical material, examples of real trades and feedback from a mentor — this is what courses are valuable for, if they are conducted by a practicing trader.
These tips for novice traders will significantly improve your stock trading faster if you apply them all in practice. Each of these points is important, but only together are they able to bring your trading to a high professional level. The main thing is not to be afraid to develop, learn new things and then everything will definitely work out for you!
As practice suggests, it is better to adopt knowledge from people who have already achieved success