If you want to become a profitable stock trader, the first thing you do is look online to find resources that can help you get into stock trading. For new traders, there is so much information online that it can seem distracting rather than helpful. Most traders just want actionable advice that can get them making money as soon as possible. Each of the rules outlined below can stand on its own, but there is a compounded effect when they are used together. Following them together can increase your chances of succeeding in the stock market.
Always Have a Trading Plan
The lack of a trading plan is one of the main reasons why people lose money in the stock market. Such a plan outlines your entry, exit and the money management strategy you will use for each purchase.
Formulating a trading strategy and testing has become easier because there are lots of ways to test a trade or strategy before putting your money on the line. This practice, also called back-testing, involves applying your trading strategy to a trade or stock using past data to see if that strategy would be viable. Once you have a plan and strategy in place and the back-testing shows that it is viable and could be profitable, you can go ahead and apply that strategy to real trades using real money.
Sometimes the strategy will not work as there are no guarantees in stock trading. In such cases, you can always refine it and try again. The idea here is to stick to the plan, refine your strategy and work out any kinks in your system. Making trades that do not fit into the plan or strategy, even when they seem profitable, is considered bad practice.
Treat Stock Trading Like a Business
To be a successful stock trader, you need to think about and approach it like a business and not a part-time activity, hobby or job. When approached as a job, stock trading can get frustrating because there is no regular paycheck to expect at the end of the month. When treated as a business, there is the incentive to do research and learn everything you can about stock trading, much like you would do before starting a new business.
As a trader, you have to act as a small business owner and therefore do research and have strategies in place to ensure your business is profitable and that it reaches its potential. The first step is always learning how to buy stocks. Buying stocks is not as easy as giving a brokerage your cash in exchange for the stocks. Much like any other business, you need to find out which investments would work best for you, which opportunities have the best return on investment, and which stocks are likely to continue being successful in the future.
Fortunately, there are lots of resources for new stock traders who want to learn how to buy stock as well as use them as an investment and wealth-building vehicle. This guide on how to buy stocks from Wealthsimple is thorough as it explains how to invest in stocks, where to buy stocks, how to find the right broker and a lot more. In addition to their useful guides, Wealthsimple also has a suite of financial tools to help you grow and manage your wealth.
Take Advantage of Technology
Trading is very competitive and so it is safe to assume that everyone else is using tools that give them an edge or advantage over other traders.
A great piece of technology to use is charting platforms. These give you infinite ways to analyze, view and understand the market and the stock you are interested in. These charting platforms also make it easy to back-test an idea as they present you with a lot of historical data that you can use to avoid mistakes. Additionally, technology that we normally do not think too much about, like high-speed internet, can give you a massive advantage by helping you improve your trading performance.
Always Protect Your Capital
For most people, saving a sizable amount is the only way to get enough money to find a trading account. Saving such an amount takes a lot of time and effort and this is why it is so important to protect it to ensure you do not have to go through the saving process again. Protecting your capital does not mean only making safe trades so you never lose money. All traders lose money. The best thing you can do is avoid taking unnecessary risks and using data and information to make trades where there is a minuscule risk of losing your money.
Trade Only with What You Can Afford to Lose
Before you start trading with or investing real money, ensure that all the money you are using is expendable. This money should not be allocated to anything else such as paying a mortgage. Traders should not make the mistake of thinking they can borrow money from more important things and will return it once their trades are profitable.
Losing money in a trade is traumatic and things can get even worse when you realise you have just lost money for your kids’ college fund. If you do not have enough expendable money, it is always a good idea to keep saving and hold off until you have enough to trade with. Additionally, you can opt for other investment options that are safer than stock trading.
Keep Learning the Markets
The best traders are always learning and this is why stock trading is regarded by many as continuing education. It is impossible to learn and understand the markets completely because they are always changing. Understanding the markets is a lifelong process that only stops when you exit them.
Continuous research is important because it helps you understand facts like what different movements or financial reports mean. Learning, observation and focus also help traders hone their instincts and learn the nuances and intricacies of stock trading.
It is also important to learn how to recognise when and how changes in news events, world politics, economic trends, the weather and other factors affect the markets. Understanding the past and current state of the markets, as well as everything that surrounds them, helps you be better prepared to adjust to changes in the future.
Know Your Stop Loss Level and Use it
Before you make any trade, you need to know what your stop loss is for the trade. Stop loss is the amount of acceptable risk you can take in reach trade. Some traders use a monetary amount while others use a percentage. Using a stop loss helps limit exposure and can relieve some of the stress that comes with trading. This is because you know you can only lose a certain amount on each trade.
Some traders ignore their stop loss when a trade seems particularly lucrative. This is bad practice as doing this leads to a lot more exposure. Exiting a trade at a stop loss is good practice even if the trade loses, you end up losing some money, and the trade falls within the acceptable stop loss limits.
Although you might want to exit all trades with a profit, that is not always possible. Having a stop loss helps minimise risks and losses.
Know When to Stop or Take a Break
While you may feel pressure to keep trading, you also need to know when to stop if you would like to be successful. One of the things that indicate that it is time to stop or re-evaluate your plan is an ineffective trading plan. This is a plan that presents greater losses than you had calculated and anticipated according to historical data and testing this data. The reason could be a shift in the marker or the volatility of stocks. Whatever the reason, a plan that is not working should be abandoned. When this happens, it is paramount that you remain calm, unemotional and composed. You need to evaluate your plan, adjust it and start over with an improved or new trading plan.
The second reason why you may need to stop or take a break is if you become an ineffective trader. Being an ineffective trader is not necessarily a reflection of your skills and expertise as it can be caused by stress, lack of physical activity or something else happening in your life. If you are not in peak condition, you may end up making incorrect assessments which leads to losses. In such cases, you should consider taking a break and going again in the future.
Understanding each of the rules outlined above, how they work alone, and how they work in tandem with the other trading rules, can help you become a better trader. Trading is very challenging, especially because it brings money and emotions together. However, traders who have the patience and discipline to follow the rules above and to keep learning and challenging themselves can greatly increase their chances of being successful in their trading endeavours.
