Tips for successful trading
Anyone who wants to be successful in their trading journey knows that knowledge and information are key in this industry. However, for beginners, most of the advice can be quite confusing. In the sections below, we’ve put together some practical and actionable tips for successful trading to help you out in your trading journey.
1. Make a plan
Trading can be compared to running a business in many aspects. The first step to being successful when trading is to make a sound plan that you need to stick to – even when the market goes against you.
With today’s sophisticated trading platforms and tools, testing a variety of strategies is as easy as simply creating a demo account and trading with virtual funds until your strategy is clearly defined. A key aspect is to always stick to your plan, or strategy, even when things go wrong.
In such cases, you should always have clear exit strategies and measures in place to limit your losses (such as stop-loss orders) and, if possible, use other tools to keep possible losses under control.
2. Use money you afford to lose
Before you start placing the trades, you need to make sure you can afford to lose the capital. If it’s not the case, you should keep saving until you earn enough so that a few losing trades will not potentially impact the quality of your life.
For instance, you should never trade with money that you need to pay rent, your bills, or the mortgage. Also, you should never risk more than 1%-2% of your capital in one single trade. This ensures that, even if the trade results in a loss, the overall impact on your trading capital is small.
3. Know when to cut your losses
Most people are subject to bias. One of the most important biases is placing too much importance on losing trades. Most traders prefer to hold a losing asset hoping that it will recover rather than selling it to limit their losses. However, this can erode your capital and make you end up with an inefficient trading plan (see ThinkMarkets for more details on trading plans and other tips).
Each trading decision should be rational, rather than based on emotions or regret. This is why it’s important to have a solid trading strategy in which you define clearly when to buy and, most importantly, when to sell.
Poor trades happen for a variety of reasons, but you need to consider the overall picture. Both wins and losses are normal in the trading universe, but the most important aspect is cumulative profits, not a losing trade once in a while.
4. Set goals and objectives
Any good strategy must specify quantifiable, verifiable goals and objectives and how to achieve them. For instance, you want to generate 20% returns this year – this is a measurable goal. Then, you should define how to achieve this and what strategy and trading style is best suited for you.
Goals and objectives should be tailored to your needs. Each trader is unique, and so are their goals. For instance, some traders may want to increase their wealth, others may want to trade enough to cover their monthly bills. Each goal should be measurable, so you can assess if your current strategy is appropriate or if it should be modified.
5. Avoid speculative trades
If you are a beginner, you should know that there are certain financial assets that are a lot riskier than others. For instance, penny stocks (or dollar stocks) trade for less than $5 per share and are considered very risky because these are usually new or small companies that trade over-the-counter.
Unlike large-cap stocks, they are illiquid, which means that they come with higher bid-ask spreads than other stocks and are less transparent in terms of regulations (as they don’t usually trade on stock exchanges), so they are thinly traded. For this reason, penny stocks can be extremely volatile and very difficult to analyze, compared to other large-cap stocks.
Establishing a viable trading strategy may sound simple, but there is a lot of research and trial-and-error in this process. Trading requires hard work, while discipline and knowledge can be used to significantly increase the chances of success. Consistency and a sound plan for all market scenarios must be used to stay competitive in the trading world.