If you’ve done any research about trading stocks before, you will have likely come across the famous statistic that “95% of traders fail,” or something along those lines. While there’s no official research paper that exists to back that statement up, it’s safe to say the stats certainly do not favor the beginner.
In fact, 80% of day traders quit within the first two years of opening their first account. This is probably due to a combination of poor results and an inability to handle the stress caused by market volatility. In other words, it’s certainly not for the faint of heart.
With that said, there are plenty of riches to be claimed by those who can master the charts and control their emotions, and if you can manage to strike the right balance and hone your skills effectively, you can earn a very respectable income from just about anywhere in the world (as long as you have an internet connection).
In this article, we will share a quick overview of how to begin your trading journey. By the end, you should know what it takes to survive and thrive as a trader on the stock market. Let’s get into it.
Ask yourself: What kind of investor/trader do you want to be?
As you might expect, there are many different ways to participate in the market and make a profit from the price fluctuations. For most people, it’s a good idea to focus on one discipline and develop your skills in that particular area so you can have the best chance at finding success.
The type of trader you want to become largely depends on the amount of time you want to spend in the market. Here are the most common types of trading and how long each trade typically lasts.
- Scalping – Short term – A few seconds to a few minutes
- Day trading – Short term – One-day maximum (no positions open overnight)
- Swing trading – Short/medium term – One day to several weeks
- Position trading – Long term – From a few weeks to several years
There are pros and cons to each of these disciplines, so do your research and figure out which one is best for you. Both day trading and scalping require a more intense focus to perform accurately and are not advised alongside a regular day job.
Learn the basics
Next up, you need to get a handle on the basics. This means understanding the lingo and getting to grips with how the markets function. Do you know how and why the price moves on any given stock? What about support and resistance zones?
Stock trading can be one almighty rabbit hole to go into, but for now, start with an introductory course and try and develop your understanding of the fundamentals, such as:
- Longs vs. shorts
- Bid and ask
- Margin and leverage trading
- Market opening hours
- Basic strategies
- Bankroll management
Paper trade first
If one thing is for sure, you will make mistakes. Whether that’s accidentally opening or closing a position or even buying the wrong stock entirely, errors are a natural part of the learning process. With this in mind, it’s far better to get your feet wet without actually losing your money. Enter paper trading (otherwise known as virtual trading.)
Virtual accounts allow you to test your newfound skills on the market in a low-pressure, risk-free environment. You are usually given a virtual balance that you try out on a real-time market simulator that has the look and feel of an actual stock exchange.
After all, throughout all the reading you do and courses you take, nothing will ever substitute for first-hand experience.
Work on your mindset
An often overlooked aspect of trading success is working on your mindset and controlling your emotions. Interestingly, investors tend to sell winning investments while selling their winning trades too early. Of course, this is suboptimal and leads to poor results.
If you want to make it as a trader, you must learn how to master your emotions and trade, almost like a machine. Here are some things you should keep in mind:
- Never trade with money you can’t afford to lose
- Never chase losses
- Do not trade if you are angry or irritated
- Never trade when intoxicated
- Have a clear and valid reason for your trade (set out when you will enter and exit before each trade)
- Always use proper bankroll management
Use the tools at your disposal
These days trading is a lot easier than it used to be, mostly because of the immense amount of tools traders have at their disposal. You can now get access to highly complex software, indicators, and applications that take away a lot of the hard graft traders had to do manually. Use this to your advantage! Here are some of the most commonly used tools you should familiarize yourself with:
An easy-to-use trading platform should be your first port of call. This is the place where you will open and close your trades and is each trader’s most valuable tool.
Charts, indicators, and oscillators
While these may seem like scary words, they are pretty simple to grasp with a bit of practice. When using charts, you can overlay a ton of helpful features that help you predict future market movements. These tools use previous market behavior to predict trends and price fluctuations.
A stock scanner is a screening tool that searches the markets to find stocks that adhere to your preselected set of criteria. Stock scanners have become essential for traders as they eliminate the need to manually scan the market, meticulously searching for stocks that fit your trading strategy. For example, you can ask it to highlight stocks that are trading at an all-time high, hitting support or resistance zones, or nearing a specific price point. This gives you more time to focus on the trading and less time looking for good set-ups.
Tip: Focus on one strategy and master it
People tend to try out one strategy, fail, and then immediately move onto the next one. This is a bad idea as you end up jumping from strategy to strategy; you never give yourself the chance to develop your skills and learn from your mistakes.
The unfortunate truth is that traders underperform the market index by around 6.5% annually, so if you want to beat the odds and make it as a trader, you better have a good game plan set in place. Now, this is not meant to dishearten you, but it’s definitely a good idea to approach the situation with an ounce of realism. The better you understand how hard it is to succeed and how few people actually make it, the more likely you will be to respect the craft and sharpen your mind in preparation for the journey.
The key is to take it slow and build up your knowledge over a period of time, starting with the basics and working your way up to more complex strategies.
Good luck, and don’t forget to start paper trading first!