Important Lessons for Stock Traders
It is not that hard to be a decent stock trader going long during bull market advances. It can give amateur traders a false sense of accomplishment and confidence that can come back to haunt them. Even in the best of markets, common trading mistakes can break amateur traders. If you are going to make a long-term run at trading and turn it into a profitable venture you have to start with basics and then have a never-ending thirst for knowledge to grow your skill set.
Here are 5 important lessons for stock traders.
Do Not Use Leverage
This is extremely important. As soon as you open a trading account your broker will ask you if you want a margin account. Unless you really know what you’re doing and need a margin account for short selling, just say no. Remember, just say no.
Margin means you make trades with borrowed money. Start with $25,000 and then borrow another $25,000. There you go, you have access to $50,000 to trade with. This can be a very dangerous environment for a new and untested trader.
Let us say you make a a trade and lose $40,000 because you were undisciplined or tried to double down against losses thinking the stock would recover. That’s right, you have to now have enough money to cover your margin call. That means you have to come up with another $15,000 just to break even. How much fun is trading now?
Instead, learn to trade the disciplined and correct way. Learn to manage risk and cut losses quickly before they get out of hand.
Embrace Paper Trading
When you paper trade, you make theoretical trades, and whatever software you are using treats it as if it were a real trade so you can monitor the outcome and learn without risking real money. Your account goes up and down just as it would in real trading — but capital is not at risk.
Paper trading is often overlooked, underestimated, and underappreciated. Use your paper trading time to learn your proper set-up, position management and exit strategies. This knowledge you gain from paper trading can carry long-term value and dividends when you trade for real.
You have to prepare to win.
Learn From Your Mistakes
No better lessons can be learned than from committing mistakes. Learning from your mistakes is a key to success in most any area of life. When it comes to trading it can mean the difference between making money and a zero account. One of the worst things a trader can do is move on from a trade that went bad without taking at least a little time and reflecting on what happened and how you can better prepare yourself in the future.
Examine the trade, look again at the news, see if you had the right entry point and exit point. In other words, use it as an opportunity for learning. You have to both benchmark and learn from failure as well as the success along the way.
Remember, if you miss out or turn your back on opportunities to learn from your mistakes, you are probably doomed to repeat them. In trading terms, that means losses.
Invest Time in Analysis Skills
One of the basics of investing in stocks is to understand how to analyze stock patterns and charts. You have to be able to look at a chart and see what’s going on. What story is the chart telling us about how we got to this point and where we are most likely headed. You need to know both where and why things are moving, or at least have an educated guess.
There are two main types of analysis: technical and fundamental analysis. Which you lean on more depends a lot on your strategy, but you should learn both if you’re serious about trading or investing for the long haul.
Technical analysis is all about reading stock charts and using key indicators. You’ll learn about things like moving averages, support and resistance, and pivot points.
Fundamental analysis is more concerned with the underlying fundamentals of the company like revenue, earnings, debt and projected growth.
Long-term value investors usually focus on fundamentals while traders more on the technical side.
Risk & Mental Discipline Is a Must
This is so important. Without knowing your risk tolerance and without knowing how to exercise mental control and discipline, you could and most likely will lose big time.
Let’s start with risk. In any stock market trade, the risk-to-reward ratio is the level of risk you’re willing to take, compared to the possible rewards. Once you set your level of risk, you have to maintain mental control. This goes for both sides of the trade, entry and exit and both sides of a position, making or losing money.
Hope and pray is not a legitimate strategy. Don’t get greedy. Be happy with the gains you made, and not upset that you could have made more. You’ll win more and lose less in the long run if you play it safe. Don’t turn into a gambler.
One way to really make sure you are following your own parameters and guidelines is to keep a trading journal to reflect, revisit and remind yourself of the important lessons for stock traders.
Like any other skill set, trading takes time, energy, and effort. In the beginning, you can create habits that will help you progress and help you avoid the pitfalls that so many traders fall into. Making money trading stocks takes time, dedication, and hard work towards your craft. There are inherent risks involved with investing or trading the stock market, including the loss of your investment.