If you want to learn how to trade stocks you need to know a few things upfront that can save you time and money and could possibly make the difference between becoming a successful stock trader or just another loser that says you can’t make any money trading stocks.
Here are some of my thoughts in no particular order that will help you to become a better stock trader:
Prepare To Get Educated
You spend years getting a college education or apprenticing to learn a trade, don’t expect to become a profitable trader in 2 weeks. Yes, there are always the rare phenom that will be successful from the start just like there are certain athletes that are just “naturals”,
Sadly, most of us aren’t that lucky so we must take the time to train ourselves to trade well. I know you are excited about the prospect of making money in the stock market but you will be much better off if you spend some time familiarizing yourself with the basics of trading.
I would stay clear of trading courses in the beginning because they can be skewed towards one way of trading and might actually be bad advice. Remember this, there are lots of hucksters out to get your money with miracle trading systems and courses and the rookie trader is easily swayed by great looking performance numbers and rising equity curves.
Go to Amazon and search for the trading books that have the highest ratings and read some of the reviews before buying them. One or two should get you off on the right foot. I particularly liked “Trading For A Living” because it covers many of the basics of trading along with some trading patterns that Dr. Elder uses.
Decide On A Method Of Trading
You need to decide how you are going to trade and top traders will write up a formal trading plan that they adhere to religiously. Are you going to trade long only? What about shorting the market? Will you trade just a few stocks or look at all stocks as possible trading candidates? Will you use hedging/leverage techniques? What about your money management plan?
This is why you need to spend some time getting a feel for what trading is really all about. The pros have a plan that they developed that works for them (Key Point) and you need one too.
Without a solid plan of how you will be trading you are just gambling with your money and you will be much better off if you went to Vegas because at least you will have fun losing and might see a couple of shows to boot.
Realize That Trading Is A Business
A hobby is an activity you spend money on that gives you pleasure. A business is something that is intended to make a profit. Which one will your trading become? If you said hobby then welcome to the loser’s lounge.
You need to get serious and treat trading as a business. Businesses have expenses and trading will too. Software, data feeds and computers are just a few expenses you might incur in setting up your trading business. Good record keeping is a must for both tax and performance purposes and when in doubt always consult a tax professional.
Get A Good Discount Broker
If you are just starting out and are not planning on trading large blocks of stock you should look for a broker that charges .01 or less per share. Interactive Brokers is probably the best trader’s choice for anyone looking to keep commissions down. Note: Commissions are a trading expense and you want to minimize them as much as possible without sacrificing good service.
If you plan on trading large blocks of stock then the $5.95 – $9.99 per trade might be more economical for you but since you are just starting out you probably won’t be trading “size” and will end up cutting into your bottom line quite a bit by paying such high fees.
Have Enough Money To Trade
Being undercapitalized will doom a business and trading is no different. If you only have a couple thousand dollars you will severely limit you’re trading options and unless you use margin or other leveraging techniques it will take a fair amount of time to build up your trading account balance.
By the way, please avoid margin or other leveraging methods when you are just starting out.
I would try and scrape together at least 10K to start with and make sure this is not your rent or food money. This HAS to be money that you can afford to lose and with proper money management you can stack the odds greatly in your favor.
Money Management
Part of your trading plan should include a section on money management. There are many different money management techniques and you will need to decide on what makes sense for your trading style.
An example of bad money management is to double down on a loss thinking that you will hit a winner on the current trade. Good money management might be something like putting no more than 5% of your trading account into any one trade and having an exit strategy to minimize any losing trades.
I can’t tell you what technique you should use so you will need to read about different money management methods and pick one and stock to it.
Control Your Emotions
A good trader approaches trading with no emotions. They see a promising trade setup and they calculate their risk and make the trade with a predefined stop to get out in case the trade goes against them and oftentimes an exit strategy for taking profits as well.
Amateur traders ignore their trading plan and go with their gut because they just know that “this trade is different”. They will stick with losing trades because they strongly believe the stock will go back up. They will hang on until it becomes so painful seeing the losses adding up that they finally capitulate and close their position.
They then get frustrated as the stock turns around and rises in price making them think that maybe next time they will hold on a little longer. Couple this with the inability to take a profit and you have a trader that is doomed to fail over and over until they go bust.
Of any factors that can wreak havoc on a trader’s ability to make money in the stock market emotions is easily the number one reason people don’t make money.
Here is a perfect example for those that remember the dot com meltdown in the late 90’s. Stocks got so high and people were so greedy that when the top finally came and prices started to decline people that were sitting on astronomical profits froze like deer in the headlights because they were afraid to sell.
They reasoned that if the stock was $300 a share and now was down to $250 they didn’t want to lose $50 a share and it surely will go back up they told themselves. Keep in mind that they might have picked up the stock for $50 a share several months earlier and had a 5 fold increase in their wealth.
They watched in horror as the stock dropped down to less than a dollar a share and sat there wishing it would just go back up to $50 so they could at least break even on the trade and get their money back.
I can guarantee you that if the stock went up to $50 a share they would not sell because of greed.
Greed will kill you as a trader. Period. Control your emotions.
Since this post is getting rather long I will end here. The take away for you is to educate yourself before you commit your money to trading. Take your time, the market will always be there.