One of the most famous landmarks in the world of trading is a sculpture of a bull and a bear by Reinhard Dachlauer symbolising opposite market trends, which is situated near the Frankfurt Stock Exchange in Germany. These statues show how different we all are. And how generous the market is, giving equal chances to anyone who wants to learn the trading laws that can be expressed in 5 main principles.
1. The initial capital
Have you ever heard of the ‘90-90-90’ rule in trading? That means 90 people lose 90% of capital within the first 90 days on the market. The intention of this example is not to discourage you from trading but to show that it is not as simple as it may seem. To be a successful trader you need to learn how to explore the stock market.
There is no magic secret or 100% successful trading strategy. From the moment that you enter the market, you should be ready for any outcome. First of all, decide what amount of money you can contribute to trading. Do not use borrowed money, or your savings for college or retirement. It should be a sum that you could lose without pain. Remember the rule of ‘90-90-90’. There is a long way for you to go, so you need to use your resources reasonably.
Amateurs think about how much money they can make. Professionals think about how much money they could lose.Jack Schwager, an expert in stock market trading
2. How to start trading
If you have a smartphone, it is quite easy to start trading in the stock market. In fact, all you have to do is download an app from a stock broker and get to the essence of online trading. It goes without saying that you need a banking account, an email, a social network profile or a google id etc. Some brokers take their commission per each trade, others charge you only when you get profit.
Beforehand you can practice on simulators which imitate real trades.
Most brokers give recommendations to their clients, which equities to buy or sell. It is up to you to follow or ignore these recommendations. However, experienced market traders agree that trading is a very individual matter. Something that works well for one person will not work for another. You will have to find your own path in trading anyway.
3. Trading strategy
There are several main investment strategies on the stock market. Which one to choose depends mainly on your personality. If you are generally impatient, then long-term investments (so called ‘position trading’) may not be suitable for you. On the contrary, if you are a peaceful person who hates constant stress, you are unlikely to enjoy day-trading or swing trading which intend for quick profit. You can hardly choose the right strategy to trade shares from the very start. Try different approaches to find out which is going to be the best for you. It is the pleasant part of trading that you can tune the whole process according to your personal preferences. You can create your own working space, comfortable, pleasant and productive.
4. Reduce your risks
Risk management is a very important part of trading. There are three main methods of reducing the risk of capital loss.
- You might have heard that it is necessary to diversify your portfolio. That means you should acquire stock of companies from different fields of business. For example, if you buy shares of only one or even five companies which belong to the same industry, let us say oil extracting, your portfolio is highly risky. A single negative news will ruin it because the quotes of shares in all companies will fall. On the other hand, a portfolio with stocks of 30 companies from various fields is considered to be a low risk one.
- Keep away from leverage, that is a means to multiply your possible earnings but also the shortest way to lose everything may something go wrong.
- Use a stop loss. This is a good instrument for a day-trader, as it works best in the short term. Set a maximum percentage of loss that you can afford in one day, for instance 1% of your capital, and stick to it.
Note! Diversify your portfolio to reduce your risks on the stock market.
5. How much can you earn on stock market
The purpose of trading is to get an additional income. Can we predict what will be the exact amount of our earnings? There is a wide range of analytical software intended to forecast the market behavior. With the help of this software you could estimate an approximate earnings range depending on your portfolio. But in real life a lot of unpredictable things happen. “The goal of a successful trader is to make the best trades. Money is secondary.” This is a saying of Alexander Elder, a professional trader and a teacher of traders. The meaning of this saying is that it is better to have a proper approach to trading than to conclude a single lucky trade. Because if you choose the right style of trading, it will help you to make a lot of good trades in the future.