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In this blog we will look at 10 things you must know as a beginner trader, including strategies and strategic tips.
Tips
1. Choose a sector and do your research
You do need to diversify your portfolio in order to minimize risk, but you should initially start with one sector that you are comfortable with or interested in. This will help you get a handle on the forces that impact stock prices in this sector and will help you buy and sell stocks according to stock price predictions that you make based on factors that you expect to impact the market .
2. Use technical analysis
If you intend to be a day trader, you have a very small window to buy and sell stocks. As such, timing is everything. You need to find a way to buy when the stock price is low and sell when the stock price is higher, within the same day. To make such precise price predictions, you need to look at historic pricing to be able to gauge how prices are going to move in the near future (that is, over the next few hours). You must be able to use technical charts and indicators to your advantage and you must develop the ability to spot patterns that will help you to make price predictions.
3. Start small
As a day trader, you try to benefit from small price changes, over large volume buying and selling. That said, until you find your feet, you should trade with small amounts of capital because if you act on an incorrect prediction, you might take home correspondingly large losses.
4. Always fix a stop loss
Even if you are an experienced day trader, especially if you are a beginner day trader, be sure to set a stop loss. This means that your positions will be closed (or shares will be sold) if the stock price falls below a certain amount, thus limiting your losses to the level of the stop loss.
A special tip: Do not be overly conservative with your stop loss, especially in high volatility conditions because your positions might get closed before the stock price has the chance to increase. Be realistic and set a stop loss that is in line with your risk appetite.
5. Always fix a target price
Greed and fear contribute to emotional trading, which is a recipe for disaster, because the stock market must be approached calmly, logically and with an eye on technical charts. Fear can be managed by setting a stop loss and greed must be managed by noting down a target price. Once the stock price reaches the target, the day trader must not let greed push him to stay in the game longer as he might end up losing out when the stock price suddenly turns around. Sell at the calculated and predetermined target price.
6. Start with a small window
Day trading can be a mentally and emotionally stressful exercise that needs focussed attention. You may or may not have the attention span to stay fully on and on high alert for the entire trading day. Also, if you intend to carry it out alongside your day job, you might want to pick a fixed interval to conduct your day trading. Try to enter low and exit high during this window and be sure to close your positions if you intend to divert your attention elsewhere because you might miss an opportunity when your eyes are not on the price charts.
Strategies
7. Following the trend
Most experts and beginner traders agree that this is the ideal strategy for beginner traders. In this strategy, you will buy prices as they start to increase and hold them until you see the price turning around and once this happens, promptly sell before the price drops to or below the price you bought at.
8. Contrarian investing
This type of investor has the kind of market knowledge that allows them to be able to take the risk of buying when the market is falling (knowing that they will sell at a higher price nonetheless), and selling when the market is rising knowing that they bought (or will buy) at a lower rate than the current market price.
9. Scalping
This day trading strategy takes advantage of pricing inefficiencies in the bid-ask spread. You might need fairly high end trading tech for this because you have to enter and exit positions at breakneck speed, within minutes or even seconds.
10. News-linked trading
Day traders who trade the news are one of the main causes of all the daily volatility in the market. These traders will buy stock when there is good news linked to the company, sector, or economy and sell when there is bad news. When they buy in large quantities, the stock price is driven up (usually resulting in more buying) and when they sell in huge quantities, the stock price is typically driven down (resulting in some traders dumping stock and prices potentially being driven down further).
Whatever trading strategy you choose, be sure to use the first 6 points (or the tips) offered in this blog to minimize your risks. Also trade within your risk appetite – that means setting a stop loss at a level that is comfortable to you both realistically and emotionally, and trading with capital that can be risked, or capital that you have managed to save after setting aside sufficient funds for daily expenses for yourself and those who depend on you. In order to have capital you can risk, you must have a steady source of income from your salary or fixed income investments.
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