Successful stock trading not only requires a comprehensive understanding of the stock market but also the creation and observance of a trading strategy that manages to succeed more than it loses. For those curious about the thrill of short-term buying and selling and how to do it, below are the basics of stock trading and the steps that can help you get started.
What is stock trading?
Simply put, stock trading entails buying and holding stocks for a short period of time in order to potentially turn a quick and significant profit. Traders, therefore, aim to take advantage of short-term pricing fluctuations occurring in the market.
Trading can be contrasted with investing. This is the approach to the stock market that aims to build wealth gradually by holding assets over a long period of time. While investors hold stocks for many years, traders usually hold them for only an hour, a day, a week, or just a few months.
There are two main types of stock trading – active and passive. Active trading is a highly technical approach with the goal of taking advantage of short-term price fluctuations. Whereas passive trading tends to focus more on the stock’s long-term trends.
Understand how the stock market works
In order to succeed at stock trading and take advantage of the market, it is important traders have a deep knowledge of how it works. For instance, traders should know some of the key terms often used by stock traders. They should also know what a stock is, what a stock exchange is, and what causes stock prices to move up or down, among other details.
In addition to understanding the basic operations of the stock market, traders should spend some time reading books and other content published by financial experts, so they can hone their trading strategies. They should further keep up to date with current events as well as economic and business development, which could influence stock prices. This way, traders are better prepared when changes develop in the stock market.
Create a trading plan
According to some financial experts, the failures of many investors lie in the fear and greed cycle. Most novice traders have the bad habit of buying stocks just because everyone around them is doing the same thing and they feel compelled to join. Then, they also end up selling the stock because the price is falling, and everyone is exiting at the same time.
Therefore, most notice traders end up buying at a high price and selling at a lower price. As such, learning how to trade in the stock market requires traders to have a proper trading plan instead of just jumping on various bandwagons.
Below are a few components that a good stock trading plan should have:
What stocks to buy (Fundamental analysis)
It is counterproductive to buy every single stock there is. As such, traders must decide on a criteria that a stock must meet before they buy it. Some factors to consider include the level of liquidity the stock needs to have, its volatility, earnings potential, and the condition of the company’s balance sheet.
This process is often called fundamental analysis. While investors tend to be more concerned about long-term factors that will affect the long-term price of the stock, traders tend to be concerned about short-term movements.
The key here is to decide which factors are the most important, and then create a checklist that will show whether a stock qualifies or not. In creating a checklist, traders can glean insights from other professional traders. Instead of simply copying another’s strategy, traders should learn from others and take what they consider to be key ideas to help them create their own strategy, which will tell them what stocks to trade.
Decide when to buy stocks (technical analysis)
After deciding what to buy, traders must also have a strategy that tells them when to buy a stock. This is the heart of technical analysis, one of the most important parts of learning stock trading for beginners.
Technical analysis has three main components. The chart (such as line charts and candlestick patterns), moving averages (like simple moving averages and exponential moving averages), and indicators (such as stochastic oscillators, Bollinger bands, RSI, and MACD). After learning about technical analysis, traders need to select, study, and follow the charts, moving averages or indicators that will best determine their own trading strategy. While traders should avoid over-comprehensive, they must still aim to be comprehensive enough.
Decide when to sell stocks (risk management)
The process of determining when to take a profit or cut off losses is part of what is called risk management. This is crucial because while it is impossible to never lose money in trading, the important goal is to gain back more than a trader loses. In essence, a good risk management strategy can help traders minimise their losses while potentially maximising their gains.
The first component of risk management is deciding what portion of funds should go into a particular trade. The second component of risk management is knowing when to get out of a trade to avoid further losses.
Practice and improve trading plan
Once a trader has decided on a trading strategy, they must test its effectiveness before putting in large amounts of capital. Learning how to start trading stocks successfully requires traders to practice their trading strategy, analyse its profitability, and improve upon it when necessary.
This can be done by using a demo account. Most brokerage firms provide one for their clients. These accounts are entirely risk-free because users cannot earn any monetary gains or incur financial losses. This is due to everything being done in a simulated and virtual environment. Instead, these places are great for traders looking to hone and improve their trading strategies and skills.
Select a trading platform
The kind of trading platform a trader utilises will also affect their stock trading experience. This is because brokerage firms are not created the same. The first point to consider is fees and commissions. Some platforms charge certain commissions, meaning it is always a good idea to do thorough research on a brokerage firm before committing to working with them.
In addition to fees, trading platforms also differ by security, trading aids, customer support, number of products and markets on offer, and the types of orders traders can create (such as market, limit and stop). All in all, the goal here is the pick a trading platform that provides the best value for money and suits your financial goals.
Open an account
Once a trader has decided on a trading platform, the next step is to open an account with that platform. The process should be as seamless as possible so that traders can quickly access the markets and start trading. Fortunately, most brokerage firms have straightforward guidelines and instructions on their website when it comes to opening a live trading account. When in doubt, be sure to contact their customer support just in case.
Overall, in order to succeed at stock trading, one must understand the fundamentals of the stock market. In order to avoid the failures of those who fall into the fear-greed cycle, traders must have a tested and trusted trading plan in mind before they commit their funds to stock trading. The trading platform chosen also has an impact on one’s trading experience, which is why traders should take their time and thoroughly research the brokerage firm before opening a live trading account with them.