There are so many so-called rules and pieces of advice that can be applied to trading, some which directly contradict others. But in essence all traders have to contend with a fundamental dilemma: jumping into a trade without proper planning or overthinking each trade and potentially missing profitable opportunities.
Spread Co’s David Morrison offers 12 tips to help you take those first steps to becoming a successful trader. Even if you’re well down that route already, these could prove to be a useful reminder and give your trading a boost.
First of all, work out what kind of trading would suit you best. You may find the idea of day trading appealing, but do you have the time to do it? If not, then taking a medium/long-term approach could suit you better. Short-term traders tend to do best in range-bound markets. Longer-term traders do better when riding a trend.
Every trade starts with an idea. Trading ideas can come from carrying out research or looking at the world around you. Ideas can be based on big themes such as where our future energy supplies will come from or smaller ones like identifying which shops are doing well on your high street. Why not consider how innovations are affecting your own workplace? Who’s providing them and do these innovations have applications elsewhere?
Undertake some fundamental analysis. For instance, if you’re trading stock indices or FX, what is the outlook for interest rates? Which central bank is talking about raising rates and which ones about cutting? If you’re trading individual equities, what does the company’s balance sheet and income statement look like? All this can help you to think about your trading ideas in more depth.
Create a trading plan. This means carrying out some technical analysis which will help you identify where to buy and sell. Don’t worry about becoming an expert. Even a basic understanding of support and resistance levels on a chart can make all the difference in choosing good entry and exit levels.
Do your own homework and don’t following tips from others, Do your own homework before following tips from others no matter how well-intentioned. The biggest problem with following tips is that you can really never know another person’s risk tolerance. They may be prepared to take less (or more) risk than you are. They may give you a perfectly good reason for entering a trade, but can’t help if the market moves against you.
Think of every trade as a test of your research and analysis. Make sure you have a stop so you know what you’re risking. If you’re wrong, so be it! If you’ve done your money management properly then it won’t be the end of the world and another opportunity will soon come along.
Keep a trading diary. Record your losers and your winners. Face up to your losses – this can be uncomfortable at first, but this is how you learn and improve. Remember – no one wins all the time. The trick is to limit your losses and run your profits.
Always manage your money prudently. Money management is about dividing up your risk capital into small parcels so you never risk too much on a single trade. If one trade doesn’t work out the way you hoped then you’ll still have plenty of risk capital left to trade again. Always work to preserve your risk capital. Remember: once you’ve lost it you can’t trade with it.
Resist the temptation to overtrade and don’t trade lots of different markets simultaneously. Remember-seemingly unrelated markets can suddenly correlate, especially in times of high volatility. This can lead you to be over-exposed at the most risky times.
Don’t chase a market. If you miss your entry level and the market gallops off, don’t go after it. It’s frustrating, but jumping in late can lead to losses. Either wait for a significant correction or let it pass completely. There will always be another trading opportunity so have patience. Don’t be tempted to override your rules for the sake of being in the markets.
Deciding not to trade is still a trading decision. But at the same time, don’t be too fearful to get involved. After all, you’re doing this because it interests you and you want to make money.
Don’t forget: there are two types of capital – monetary and mental. Always use risk management tools to protect both. The last thing you want is sleepless nights because a market is moving against you and you haven’t taken action to limit your potential loss.
Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.