How to Start Trading

Trading is risky and requires a level of time and commitment to fully understand the market. However, with research and planning, you can discover a successful trading strategy.

My detailed guide will help you identify what sort of trader you are, and how to take advantage of short-term price movements in order to make a profit.

The key difference between investing and trading

Before you start trading stocks or any other asset, it’s important to understand the difference between investing and trading and identify which of these two strategies would best suit your appetite for risk.

Are you looking to buy assets and hold them for a considerable amount of time, maybe even years? This would make you an investor as opposed to a trader. This is a long-term, lower-risk strategy that gives you time to ride out any volatility in the stock market.

Or, are you looking to capitalize on short-term price fluctuations in the stock market by exchanging stocks more frequently, by the second, minute, or day? This would make you a trader. Most traders lose money and therefore it is imperative that you set off with a robust plan and a clear understanding of how to make a profit.

What kind of trader are you?

There are two main types of trading:

1. Day trading – buying and selling financial instruments within a single trading day, closing all positions before the stock market closes.
2. Swing trading – buying and holding a tradable asset for more than one day in order to profit from fluctuations in stock price or ‘swings’ in stock price.

Both of these would be considered short-term investing, with day trading representing a higher-risk environment that requires considerable time and effort and swing trading being considered a slower, more calculated, and less risky option to trade stocks.

It is wise to consider that day trading can be detrimental for beginners, often resulting in losses. With this in mind read on for details of my 5 steps to start trading.

How to start trading the stock market

So, without further ado, let’s take a look at what is required to start successfully trading on the financial markets.

1. Set your budget

As mentioned previously, trading stocks is a tricky business, especially for a complete beginner. Therefore, it may be wise to assign a portion of your total portfolio to trade whilst leaving the remainder in safer, long-term investments in order to manage risk.

The important thing when setting a budget is to stick with it, regardless of what happens. Do not be tempted to chase losses by increasing your budget.

Successful traders will often only allocate a tiny portion of their total budget towards new investments or companies as these are very high risk. It is also important to set a budget for each individual trade.

Your budget will depend on your personal circumstances, however, you should never budget more than you are prepared to lose.

2. Learn the principles of technical analysis and how to use the tools available

Successful trading should be based on proper research and analysis, considering historical market data in order to determine a company’s true value. This involves analysis of stock price movements and statistical trends and patterns using charts in order to determine a forecast of future price movements. Take into account financial statements as part of a disciplined trading strategy, often used in conjunction with fundamental analysis.

Remember, these tools can take the guesswork out of trading individual stocks, especially for day traders who will buy and sell stocks in a single day.

The suite of tools available will vary according to the trading platform you use and it is, therefore, advisable to consider this when selecting your broker as this can help take some of the guesswork out of trading.

In addition, an online broker that offers comprehensive educational resources can help you learn how to tilt the odds in your favor.

3. Choose a broker

A broker facilitates the act of buying and selling stocks. This is done via a trading platform, which is a piece of software which shows stock quotes, charts, research, market activity, and buy and sell capabilities.

Each broker will have a unique pricing structure, as well as varying levels of education and available technical analysis and tools. When selecting the best broker consider the following:

• Fees – Swing traders and day traders should look for zero-commission trading in order to keep fees low when executing trades.
• Fast order execution – this is essential for active traders as even a one-second delay can have an impact on your trade.
• Tradable assets – you may already know what financial assets you wish to trade, whether it is stock trading, futures, options, forex, CFDs, or any other financial asset. Ensure the broker provides access to the assets that interest you.
• Tools and features – the tools and features on offer can be a significant influence on your trading acumen as well as your risk management strategy.
• Education – as a novice trader, education will be an important service on offer. This can vary wildly between platforms but is often accessible from the main website before you commit to opening an account.
• Safety – ensure the broker is regulated by The Securities and Exchange Commission.

4. Open a virtual account and practice your knowledge

Virtual trading or paper trading is the practice of trading in exact market conditions using virtual funds and thereby eliminating any risk. This is for educational purposes only and can help a complete novice go through the motions of stock trading and testing their trading approach, whilst learning how to use the trading platform, from a virtual trading account.

Of course, whilst a virtual brokerage account can help simulate actual trading conditions, a successful virtual trade, repeated with real funds, holds no guarantee of success due to constantly changing market conditions. However, this is an effective way of enhancing your trading skills for beginner traders.

5. Plan and execute your first trade.

Once you have a decent grasp of the platform you have chosen, it will be time to open a real account and begin trading. You will need a robust trading plan in place that accounts for time, risk, and objective. Active trading requires a lengthy and detailed plan, that is written down and followed exactly without any deviation unless ways to improve the plan are identified.

Should the rules of when you should enter a trade come into play, whether this is as a result of a chart pattern, a predetermined price point, a technical indicator, or other factors, this will be the time to execute your first trade.

Remember, it is also important to know when to exit a trade. Many brokers will offer limit orders and stop orders to assist with your tactical trading plan. A market order will buy or sell an asset as soon as possible at the best possible price. A limit order will buy or sell an asset only when it reaches a price previously set by you.

Leave emotions at the door as they will influence your decisions negatively and remember that even professional traders will incur losses as they trade.

What is the stock market?

The stock market is where shares in a company can be bought, held, or sold by market participants via a third-party exchange. This helps companies raise much-needed capital by selling shares of their company whilst allowing traders and investors the opportunity to profit from a rise in the value of those shares.

Understand your commitment to the IRS

Any profit that you make as a result of trading could be subject to Capital Gains Tax. Ensure you take this into consideration before making the decision to start investing or trading and always keep good records.

Ways to mitigate your risk

Managing your risk is a vital part of any successful trading strategy. It makes financial sense to start by investing small amounts and gradually build your trading budget as your confidence grows. Investing the bulk of your portfolio in mutual funds, index funds, or exchange-traded funds is often an effective way to manage your exposure to risk.

The bottom line

For every person who has made a profit buying and selling stocks, there are thousands who have lost money. The main difference between profit and loss will lie in the amount of research and planning that takes place before a single trade is carried out.

FAQs about trading

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