Trading for beginners: The road ahead
Trading for beginners is a difficult subject to write. I think its like writing medicine for beginners. One thing that we should be clear about when we begin trading is that this is not investing. The time frame that is better to look for is short duration. But then again when we say short duration, how long?
How Long – The Timeframe:
The first thing a trader must plan when starting to trade is how long do you plan to hold on to a short or a long position. This is important to work out your own trading system. As a beginner I have seen most people jump into day trading. While day trading has its advantage like no overnight or weekend risk, but I would personally advise to venture in it only once you have a year of experience in the market. The best place to start out would be swing trading.
Stocks, Futures or Options – The Instrument:
To start of trading, for beginners stocks will be the best way forward but you have to keep in mind that when trading stocks you cannot go short in swing trades.
You will need to trade futures for that. Trading futures is very similar to trading stocks with 2 exceptions – One is that futures are traded in lots so you cannot buy or sell a single piece, and secondly that they expire at the end of month, mostly the last Thursday of the month. So if you are holding a future contract you might have to just square it off end of the month.
Options trading is not something that I would suggest to a new trader. Probably wait a year. Keep looking into options, studying options if you like, but do not take the jump till you have some experience with watching them from sidelines. But as a complete beginner going into a long only system with stocks is not a bad idea.
This is something difficult to explain to a beginner, how important risk is. But it is one of the most important things to survive in the market. My suggestions to you would be that if you are just starting out risk as low as .5 percent of your trading capital per trade. You will make less money in profits but you will also lose less and not go bankrupt so soon. Survival is the key in becoming a successful trader. Most people do not last in trading, as they give up too soon. The give up happens due to blowing up of your account. To avoid blowing up of your account, you have to minimise your risk per trade. You will need time to understand your true risk appetite. Till you do not know it well, my advise it to keep it low.
Technical Analysis is something that has to have some place in a traders armour. It has a very important role in mechanical trading. It could be mathematical indicators or price action. Whatever it is but this is needed to find the exact points of entry, create a system for exit and trailing stop loss. Defining the point of stop loss where you know your system has failed in a particular trade, and its time to exit. Most beginners spend too much time in technical analysis. You should remember though technical analysis is not an astrology for stock market. Nothing is definite. There is no certainty whatever your analysis says. The best traders in the world accept this uncertainty before entering a trade.
Accepting the risk and uncertainty of market:
The most difficult thing to learn in trading for beginners is to accept the uncertainty. This is a fight that is a long one and lasts for years. Also this defines the point when a beginner becomes a professional. Every trade that you enter can be a winner or a loser. When one focuses too much on technical analysis and less on risk, they are unable to accept that uncertainty and they enter every trade with an expectation that this time they will get a winner. The problem this creates is that when we think this way, we go on increasing risk after every loss as the certainty keeps on increasing. But for the market that is not the case. Stock and commodity markets are unaware of whatever happened in your last trade.
Therefore as a beginner you should be prepared for any outcome of any trade. Which is why risk is such an important subject.
Everyone gets into trading to make money, which is how it should be. We hear a lot about importance of following the process and focusing less on money. This is important but difficult to understand. But this is important. More so for beginners. As a beginner the goal should be learning the skills and not making money. The time to make money will come, but one has to wait, live through the process of education. Lose some money to the market as tuition fees. If trading was so easy everyone would be millionaire in the world. This is a difficult battle where the fight is with your own self. So my final advice is give it time. Let the lessons flow, do not go out all in and lose it all.
Listing down below some good books to learn trading for beginners.