Should i be trading stocks

If you don't have the time or knowledge to keep a close eye on and make decisions about your positions you could experience a margin call.

If the value of your positions drop sharply enough then your stock may be automatically sold by the broker to recover any losses you have accrued. As a new trader use margin sparingly, if at all, and only if you understand all of its aspects and dangers. It can force you to sell all your positions at the bottom, the point at which you should be in the market for the big turnaround.

Just as anyone would warn you not to run with scissors, you should warn yourself not to rush into using leverage. Beginner traders may get dazzled by the degree of leverage they possess—especially in forex FX trading—but may soon discover that excessive leverage can destroy trading capital in a flash. Forex brokers like IG Group must disclose each quarter the percentage of traders that lose money in retail forex customer accounts.

Another common mistake made by new traders is that they blindly follow the herd; as such, they may either end up paying too much for hot stocks or may initiate short positions in securities that have already plunged and may be on the verge of turning around. While experienced traders follow the dictum of the trend is your friend , they are accustomed to exiting trades when they get too crowded.

New traders, however, may stay in a trade long after the smart money has moved out of it. Novice traders may also lack the confidence to take a contrarian approach when required. Diversification is a way to avoid overexposure to any one investment. Having a portfolio made up of multiple investments protects you if one of them loses money.

It also helps protect against volatility and extreme price movements in any one investment. Also, when one asset class is underperforming, another asset class may be performing better. Many studies have proved that most managers and mutual funds underperform their benchmarks. Despite all of the evidence in favor of indexing, the desire to invest with active managers remains strong.

John Bogle, the founder of Vanguard , says it's because: "Hope springs eternal. Indexing is sort of dull. It flies in the face of the American way [that] "I can do better.

This may satisfy your desire to pursue outperformance without devastating your portfolio. New traders are often guilty of not doing their homework or not conducting adequate research, or due diligence , before initiating a trade. Doing homework is critical because beginning traders do not have the knowledge of seasonal trends, or the timing of data releases, and trading patterns that experienced traders possess.

For a new trader, the urgency to make a trade often overwhelms the need for undertaking some research, but this may ultimately result in an expensive lesson. It is a mistake not to research an investment that interests you. Research helps you understand a financial instrument and know what you are getting into. If you are investing in a stock, for instance, research the company and its business plans. While this is not an easy task, and every other investor has access to the same information as you do, it is possible to identify good investments by doing the research.

Everyone probably makes this mistake at one point or another in their investing career. You may hear your relatives or friends talking about a stock that they heard will get bought out, have killer earnings or soon release a groundbreaking new product. Even if these things are true, they do not necessarily mean that the stock is "the next big thing" and that you should rush into your online brokerage account to place a buy order.

Other unfounded tips come from investment professionals on television and social media who often tout a specific stock as though it's a must-buy, but really is nothing more than the flavor of the day.

These stock tips often don't pan out and go straight down after you buy them. Remember, buying on media tips is often founded on nothing more than a speculative gamble. This isn't to say that you should balk at every stock tip. If one really grabs your attention, the first thing to do is consider the source.

The next thing is to do your own homework so that you know what you are buying and why. For example, buying a tech stock with some proprietary technology should be based on whether it's the right investment for you, not solely on what a mutual fund manager said in a media interview. Next time you're tempted to buy based on a hot tip, don't do so until you've got all the facts and are comfortable with the company. Ideally, obtain a second opinion from other investors or unbiased financial advisors.

There is almost nothing on financial news shows that can help you achieve your goals. There are few newsletters that can provide you with anything of value. Even if there were, how do you identify them in advance?

They'd keep their mouth shut, make their millions and not need to sell a newsletter to make a living. Spend less time watching financial shows on TV and reading newsletters. Spend more time creating—and sticking to—your investment plan. For a long-term investor, one of the most important but often overlooked things to do is a qualitative analysis or to look at the big picture.

Legendary investor and author Peter Lynch once stated that he found the best investments by looking at his children's toys and the trends they would take on. The brand name is also very valuable. Think about how almost everyone in the world knows Coke; the financial value of the name alone is therefore measured in the billions of dollars. Whether it's about iPhones or Big Macs, no one can argue against real life.

So pouring over financial statements or attempting to identify buy and sell opportunities with complex technical analysis may work a great deal of the time, but if the world is changing against your company, sooner or later you will lose. After all, a typewriter company in the late s could have outperformed any company in its industry, but once personal computers started to become commonplace, an investor in typewriters of that era would have done well to assess the bigger picture and pivot away.

Assessing a company from a qualitative standpoint is as important as looking at its sales and earnings. Qualitative analysis is a strategy that is one of the easiest and most effective for evaluating a potential investment. Beginning traders may tend to flit from market to market—that is, from stocks to options to currencies to commodity futures , and so on. Trading multiple markets can be a huge distraction and may prevent the novice trader from gaining the experience necessary to excel in one market.

Keep in mind the tax consequences before you invest. You will get a tax break on some investments such as municipal bonds. Before you invest, look at what your return will be after adjusting for tax, taking into account the investment, your tax bracket, and your investment time horizon.

Do not pay more than you need to on trading and brokerage fees. By holding on to your investment and not trading frequently, you will save money on broker fees. Also, shop around and find a broker that doesn't charge excessive fees so you can keep more of the return you generate from your investment. Investopedia has put together a list of the best discount brokers to make your choice of a broker easier.

Trading is a very demanding occupation, but the "beginner's luck" experienced by some novice traders may lead them to believe that trading is the proverbial road to quick riches. Such overconfidence is dangerous as it breeds complacency and encourages excessive risk-taking that may culminate in a trading disaster. From numerous studies, including Burton Malkiel's study entitled: "Returns From Investing In Equity Mutual Funds," we know that most managers will underperform their benchmarks.

We also know that there's no consistent way to select, in advance, those managers that will outperform. We also know that very few individuals can profitably time the market over the long term. Fidelity guru Peter Lynch once observed: "There are no market timers in the Forbes If you insist on becoming an active trader, think twice before day trading. Day trading can be a dangerous game and should be attempted only by the most seasoned investors. In addition to investment savvy, a successful day trader may gain an advantage with access to special equipment that is less readily available to the average trader.

Did you know that the average day-trading workstation with software can cost in the tens of thousands of dollars? You'll also need a sizable amount of trading money to maintain an efficient day-trading strategy. Online brokers' systems are not quite fast enough to service the true day trader; literally, pennies per share can make the difference between a profitable and losing trade.

Most brokerages recommend that investors take day-trading courses before getting started. Unless you have the expertise, a platform, and access to speedy order execution, think twice before day trading.

If you aren't very good at dealing with risk and stress, there are much better options for an investor who's looking to build wealth. Some investors tend to believe that they can never excel at investing because stock market success is reserved for sophisticated investors only. As a day trader, you need to learn to keep greed, hope, and fear at bay.

Decisions should be governed by logic and not emotion. Successful traders have to move fast, but they don't have to think fast. Because they've developed a trading strategy in advance, along with the discipline to stick to that strategy. It is important to follow your formula closely rather than try to chase profits. Don't let your emotions get the best of you and make you abandon your strategy. There's a mantra among day traders: "Plan your trade and trade your plan.

Before we go into some of the ins and outs of day trading, let's look at some of the reasons why day trading can be so difficult. Day trading takes a lot of practice and know-how, and there are several factors that can make the process challenging.

First, know that you're going up against professionals whose careers revolve around trading. These people have access to the best technology and connections in the industry, so even if they fail, they're set up to succeed in the end. If you jump on the bandwagon, it means more profits for them. Uncle Sam will also want a cut of your profits, no matter how slim. Remember that you'll have to pay taxes on any short-term gains—or any investments you hold for one year or less—at the marginal rate.

The one caveat is that your losses will offset any gains. As an individual investor, you may be prone to emotional and psychological biases. Professional traders are usually able to cut these out of their trading strategies, but when it's your own capital involved, it tends to be a different story. Day traders try to make money by exploiting minute price movements in individual assets stocks, currencies, futures, and options , usually leveraging large amounts of capital to do so.

In deciding what to focus on—in a stock, say—a typical day trader looks for three things:. When you know what kind of stocks or other assets you're looking for, you need to learn how to identify entry points —that is, at what precise moment you're going to invest. Tools that can help you do this include:. Define and write down the conditions under which you'll enter a position.

Something like this is much more specific and also testable: "Buy when price breaks above the upper trendline of a triangle pattern , wherein the triangle was preceded by an uptrend at least one higher swing high and higher swing low before the triangle formed on the two-minute chart in the first two hours of the trading day.

When you have a specific set of entry rules, scan through more charts to see if those conditions are generated each day assuming you want to day trade every day and more often than not produce a price move in the anticipated direction. If so, you have a potential entry point for a strategy.

You'll then need to assess how to exit, or sell, those trades. There are multiple ways to exit a winning position, including trailing stops and profit targets. Profit targets are the most common exit method, taking a profit at a predetermined level. Some common price target strategies are:.

The profit target should also allow for more profit to be made on winning trades than is lost on losing trades. Just like your entry point, define exactly how you will exit your trades before entering them.

The exit criteria must be specific enough to be repeatable and testable. To help determine the most opportune moment to buy a stock or whatever asset you're trading , many traders utilize:. There are many candlestick setups a day trader can look for to find an entry point. If followed properly, the doji reversal pattern highlighted in yellow in the chart below is one of the most reliable ones.

Typically, look for a pattern like this with several confirmations:. If you follow these three steps, you can determine whether the doji is likely to produce an actual turnaround and can take a position if the conditions are favorable. Traditional analysis of chart patterns also provides profit targets for exits. For example, the height of a triangle at the widest part is added to the breakout point of the triangle for an upside breakout , providing a price at which to take profits.

A stop-loss order is designed to limit losses on a position in a security. For long positions , a stop-loss can be placed below a recent low, or for short positions , above a recent high. It can also be based on volatility.

Define exactly how you'll control the risk of the trades. One strategy is to set two stop-losses:. However you decide to exit your trades, the exit criteria must be specific enough to be testable and repeatable.

Also, it's important to set a maximum loss per day you can afford to withstand—both financially and mentally. Whenever you hit this point, take the rest of the day off. Stick to your plan and your perimeters. After all, tomorrow is another trading day. When you've defined how you enter trades and where you'll place a stop-loss, you can assess whether the potential strategy fits within your risk limit.

If the strategy exposes you to too much risk, you need to alter the strategy in some way to reduce the risk. If the strategy is within your risk limit, then testing begins. Manually go through historical charts to find your entries, noting whether your stop-loss or target would have been hit. Paper trade in this way for at least 50 to trades, noting whether the strategy was profitable and if it meets your expectations.

If it does, proceed to trade the strategy in a demo account in real time. If it's profitable over the course of two months or more in a simulated environment, proceed with day trading the strategy with real capital. If the strategy isn't profitable, start over. Finally, keep in mind that if trading on margin —which means you're borrowing your investment funds from a brokerage firm and bear in mind that margin requirements for day trading are high —you're far more vulnerable to sharp price movements.

Margin helps to amplify the trading results not just of profits, but of losses as well if a trade goes against you. Therefore, using stop-losses is crucial when day trading on margin. Now that you know some of the ins and outs of day trading, let's take a brief look at some of the key strategies new day traders can use.

When you've mastered some of these techniques, developed your own personal trading styles, and determined what your end goals are, you can use a series of strategies to help you in your quest for profits.

Here are some popular techniques you can use. Although some of these have been mentioned above, they are worth going into again:. Day trading is difficult to master. It requires time, skill, and discipline. Many who try it fail, but the techniques and guidelines described above can help you create a profitable strategy. With enough practice and consistent performance evaluation, you can greatly improve your chances of beating the odds. Following the trend is probably the easiest trading strategy for a beginner, based on the premise that "the trend is your friend.

Scalping and trading the news require a degree of rapid decision-making and trading that again may pose difficulties for a beginner. Technical analysis, because it can enable the trader to identify very short-term trading patterns and trends, which are essential for day trading. Fundamental analysis is better suited for long-term investing, as it focuses on valuation; however, the disconnect between an asset's actual price and its intrinsic value as determined by fundamental analysis may last for months if not years.

Market reaction to fundamental data like news or earnings reports is also quite unpredictable in the short term. A guaranteed stop order guarantees a position will close at the selected rate, even if the market price gaps past it.

On the Plus platform, this feature is available for some instruments, and a fee is charged to place this order.

Traders should take the time to understand the fundamentals of the stock they would like to trade, as well as why markets move the way they do and what triggers such movements. Therefore, you should know when to enter a trade as well as when to exit your position.

Traders should take advantage of the resources widely available before they start trading stocks. You can also continue your development in trading by using our educational resources.

You should continue to utilise any resources you have available, no matter how long you have been trading. It is important to take your time and start small. When you take the leap, you should not take considerable risks. This will help you establish your trading strategies while not risking your capital. Trading strategies are plans that are implemented to increase the likelihood of achieving a profitable return. Here are some tips to take into account when creating a stock trading strategy :.

Knowing when, what and how to trade will increase your chances of having a profitable trading experience. You must also keep in mind that trading can be risky, so it's always best to build a strategy based on knowledge, test it, and stick to it.