How to Trade Stocks
Want to trade but don’t know where to start?
Millions of neophytes try their hand at the market casino each year, but most walk away a little poorer and a lot wiser, having never reached their full potential. The majority of those who fail have one thing in common: They haven’t mastered the basic skills needed to tilt the odds in their favor. However, if one takes adequate time to learn them, it’s possible to be on the way to increasing one’s odds of success.
World markets attract speculative capital like moths to a flame; most people throw money at securities without understanding why prices move higher or lower. Instead, they chase hot tips, make binary bets, and sit at the feet of gurus, letting them recommend buy-and-sell decisions that make no sense. A better path is to learn how to trade the markets with skill and authority.
Start with a self-examination that takes a close look at your relationship with money. Do you view life as a struggle, with a difficult effort required to earn each dollar? Do you believe personal magnetism will attract market wealth to you in the same way it does in other life pursuits? More ominously, have you lost money on a regular basis through other activities and hope the financial markets will treat you more kindly?
Whatever your belief system, the market is likely to reinforce that internal view again through profits and losses. Hard work and charisma both support financial success, but losers in other walks of life are likely to turn into losers in the trading game. Don’t panic if this sounds like you. Instead, take the self-help route and learn about the relationship between money and self-worth.
When you get your head on straight, you can embark on learning trading and start with these five basic steps.
- Open a Trading Account
Sorry if it seems we’re stating the obvious, but you never know! (Remember the person who did everything to set up his new computer—except to plug it in?) Find a good online stock broker and open a stock brokerage account. Even if you already have a personal account, it’s not a bad idea to keep a professional trading account separate. Become familiar with the account interface and take advantage of the free trading tools and research offered exclusively to clients. A number of brokers offer virtual trading. - Learn to Read: A Market Crash Course
Financial articles, stock market books, website tutorials, etc. There’s a wealth of information out there, much of it inexpensive to tap. It’s important not to focus too narrowly on one single aspect of the trading game. Instead, study everything market-wise, including ideas and concepts you don’t feel are particularly relevant at this time. Trading launches a journey that often winds up at a destination not anticipated at the starting line. Your broad and detailed market background will come in handy over and over again, even if you think you know exactly where you’re going right now.
Start to follow the market every day in your spare time. Get up early and read about overnight price action on foreign markets. News sites such as Yahoo Finance, Google Finance, and CBS MoneyWatch serve as great resources for new investors. - Learn to Analyze
Study the basics of technical analysis and look at price charts—thousands of them—in all time frames. You may think fundamental analysis offers a better path to profits because it tracks growth curves and revenue streams, but traders live and die by price action that diverges sharply from underlying fundamentals. Your experience with charts and technical analysis now brings you into the magical realm of price prediction. - Practice Trading
It’s now time to get your feet wet without giving up your trading stake. Paper trading, or virtual trading, offers a perfect solution, allowing the neophyte to follow real-time market actions, making buying and selling decisions that form the outline of a theoretical performance record. It usually involves the use of a stock market simulator that has the look and feel of an actual stock exchange’s performance. Make lots of trades, using different holding periods and strategies, and then analyze the results for obvious flaws.
So, when do you make the switch and start trading with real money? There’s no perfect answer because simulated trading carries a flaw that’s likely to show up whenever you start to trade for real, even if your paper results look perfect. - Other Ways to Learn and Practice Trading
Though experience is a fine teacher, don’t forget about additional education as you proceed on your trading career. Whether online or in-person, classes can be beneficial, and you can find them at levels ranging from novice to pro. More specialized seminars—often conducted by a professional trader—can provide valuable insight into the overall market and specific investment strategies. It’s also useful to get yourself a mentor—a hands-on coach to guide you, critique your technique, and offer advice.
How to Manage Risk
When up and running with real money, you need to address position and risk management. Each position carries a holding period and technical parameters that favor profit and loss targets, requiring your timely exit when reached.
Risk management techniques will vary in complexity and will depend on your particular strategy, but there are some overall tips. Know your entry and exit points and stick to them, unless you have a good and objective reason to change them. Set stop-losses and take-profit orders accordingly. Cut losses early and avoid the emotional or psychological urge to take on ever greater risk in hopes of breaking even. More importantly, don’t panic.
If you’re building a long-term buy-and-hold portfolio, diversification can lower your overall risk without sacrificing expected return. Also think about when to rebalance your portfolio as markets move over time.
If you haven’t done so already, now is the time to start a daily journal that documents all of your trades, including the reasons for taking risks, as well as the holding periods and final profit or loss numbers. This diary of events and observations sets the foundation for a trading edge that will end your novice status and let you take money out of the market on a consistent basis.
What Are the Main Differences Between Trading and Investing?
Major differences between trading and investing include (a) investing time horizon: this can span years or decades because the objective is long-term wealth accumulation, while trading involves much shorter time spans, ranging from less than a day to a few months; (b) number of trades: because investing generally means buy and hold, the number of trades is usually much lower than in trading, where frequent trades are the norm; and (c) type of trades: investing typically involves long positions only, while trading may include long and short positions to benefit from both higher and lower market moves.
What Are Some Common Trading Strategies?
Common trading strategies include following the trend, or buying when the market is rising and short selling when it is declining; contrarian trading, or going against the herd; scalping, which involves exploiting minute price gaps caused by the bid-ask spread; and trading the news.
Is Technical Analysis or Fundamental Analysis More Important for Trading?
Because technical analysis looks at the short-term picture and can help you to identify short-term trading patterns and trends, it is better suited to trading than fundamental analysis, which takes a longer-term view.
What Traits Are Necessary to Become a Successful Trader?
In addition to knowledge and experience, the most important traits for a trader are discipline and mental fortitude. Discipline is necessary to stick to one’s trading strategy in the face of daily challenges; without trading discipline, small losses can turn into huge ones. Mental fortitude is required to bounce back from the inevitable setbacks and bad trading days that will occur in every trader’s career.
