Beginner’s Guide to Stock Trading
One of the ways to build wealth is through stock trading. Trading stocks shouldn’t be as intimidating or complex as it seems. Before you get started, we got 12 guidelines to equip you for the game:
Know Thyself
Identify which trading strategy makes sense to you and your lifestyle. There are three basic strategies in the stock market, namely Swing Trading, Day Trading, or Long-Term Investing. Your strategy will depend on several factors such as your goals, lifestyle, and skills. It is best to know which holding period you are comfortable with. If you want a decent return in a short period of time but have limited time to monitor the movement of the market, Swing Trading is best for you. Click here for our post on the differences among the mentioned trading strategies.
Have a Dedicated Trading Capital
When trading stocks, you should be in a mind frame of trading right instead of trading to make money. Having peace of mind when trading is an essential recipe for success in this craft. Make sure that you are well capitalized outside of your trading account to not put yourself at a disadvantage by worrying about life expenses. There are droughts in this game, brace yourself for those periods.
Risk Management
Risk Management takes the gambling out of the game. Determine your risk tolerance either in percentage or nominal value, not risking more than 1% of your account on a single trade as a general rule, and develop a trade plan to identify at which price you will exit a losing position. Your risk tolerance and cut price should define the number of shares to have.
Define your Profit Taking Rules
In any endeavor, you must have a goal. In the same manner, when trading, you have to set your target price to know when to sell your shares in the market to earn maximum profits. One of the ways to lock in your profits is to put on a trailing stop. Trailing your stops will assure profit in case the market decides to make a U-turn before hitting your target price.
Keep Things Simple
With news articles, indicators, strategies, and traders all saying different opinions, how do you filter out which is necessary and not and keep your trading plan simple? Few things that you could do is to limit the stocks in your watchlist, the indicators you use, and the opinions and news you pay attention to. After all, price discounts everything.
Listen to the Market
One classic stock market principle is “the trend is your friend”. The market knows better than anyone else. If the prevailing trend is upward, then it is highly probable that it would continue to rally and vice versa. Make it easy for yourself; be with the trend.
Remove Your Ego
Ironic as it may sound, accepting that losing is part of the game is key to becoming profitable in stock trading. The best traders know that they do not know everything, so chances are, you will never get it right all the time. As mentioned, losing is inherent in trading, that’s why it’s important to only participate in trade ideas that have good odds of success.
Be Patient
We all know that nothing worth having comes easy. Do not be in a rush to earn $$$ right away. Remember that success does not happen overnight. It takes time to perfect your process, strategy, trading plan, mindset, and whatnot. Get your feet wet by starting small and keep learning with it. Once you have a reliable and back-tested trading plan, abide by it. Only then you can increase your risk and the rest will follow.
On the same note, never rush entering a position. Wait for your set-ups. Save your emotional allocation for something you are familiar with. Don’t trade based on emotions; stick to your trade plan!
Distract Yourself
Trading should not be the only thing you are doing. Let your mind breathe by engaging yourself in different activities such as creatives, fitness, or a side job. Work and play smart is the rule of the game. Set a time to enjoy your other passions outside of the day-to-day grind to savour that much needed break. Enjoy life and let your trades come to you.
Journal Your Trades
The best way to improve is to learn from past trades and mistakes. Having a trading journal where you take note of what went right/wrong and learned from a trade will help you analyze what you need to focus on and avoid from.
Stop Comparing Yourself to Others
You are your own competition in this game. Focus on yourself and refrain from comparing yourself from the progress of other traders. What works for you can’t be said to another person. Comparisons are unhealthy as it will make you feel frustrated and distracted from finding a method that fits your skills and personality. Remember each trader is unique in their knowledge base, capital, and learning curve. Focus on YOU.
Have a system with an edge
At the end of the day, the goal in stock trading is to have a reliable strategy that will give an overall positive impact to your account.
