Trading the stock or forex markets can seem like a panacea for all your problems; you can set your own hours, work from wherever you like and theoretically make as much money as you want. However, it’s important that you understand the reality of the risks involved, have realistic and attainable goals in mind, and develop a clear plan of action for when you’re starting out. By following these tips, you can avoid unnecessary financial risk and let your money work for you.
Start with achievable goals
There is a steep learning curve involved and new traders often underestimate how difficult it is to be successful. Don’t leave your job to commit to trading; you need to be realistic about how much money you will make, and have a safety net for if anything goes wrong.
Consider your long-term goals — if you are clear about how much capital you will need and when, you can then calculate how much you need to invest and what return you need to produce the desired result.
Set out a realistic time commitment
Trading requires your time, and so to be successful you’ll need to give up most of your day; it isn’t wise to try and make money within a few short hours. Don’t consider it if you have limited time to spare. You need to track the market to spot opportunities and moving quickly is key to success — changes can occur at any time during trading hours, and for forex trading, it’s a 24-hour market.
When starting out, you should start with safer stocks that are less volatile so you minimise your financial risk. For example, consumer staples stocks are generally understood to be safer as even in tough economic times, people need food, clothing and medical supplies. On the other hand, these are unlikely to see big gains. As a beginner, you should also focus on a maximum of one to two stocks during a session. Tracking and finding opportunities is easier with just a few stocks.
Maintain a disciplined mindset
Trading can easily become gambling if you don’t control your emotions, as the risk and opportunity involved can lead you to make illogical decisions. You can get over-enthused by success, while it can also be easy to panic when taking risks. Ensure you are taking actions based on logical and not letting greed or fear influence you.
Have a defined exit plan
You don’t need to win all the time to be profitable — most traders only win 50 or 60 per cent of their trades but take more on their winners than their losers. Ensure that your risk on each trade is limited to a specific percentage of the account, and that you have set defined entry and exit methods.
This isn’t simply about minimising loss on the downside if things go wrong. If a trade is going your way, you need to plan an exit point in advance.
Don’t wait too long to buy back into short strategies. When a trade is going well it can be easy to relax and assume it will stay that way, so you need to remember that it could easily change. Often, as soon as markets open, many orders are executed right away so it’s best to wait and make no moves for the first 20 minutes. The middle hours are less volatile as a rule, so while rush hours offer opportunities, it’s safer to avoid these at first.
Diversify your investments
Experienced investors don’t necessarily do this as they are comfortable that they can identify any dangers to their position before they make a huge loss. However, in your first years of trading, it is best to diversify your exposure so that you have stocks in different industries and across different countries. This means a single negative event won’t necessarily affect all of your holdings or will do so to less of an extent.
Many beginner traders try to jump straight into the market without any real background information, so ensure you take the time to learn about the how the markets work and the jargon used before you implement a trading strategy. Keep these tips in mind and start slowly and you will find that as your experience grows, and your strategies develop, you can find success.
Samuel Leach is CEO and founder of Samuel & Co. Trading