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Learning to invest/ trade is pretty difficult, especially for beginners. So before you make that first trade, here are 4 lessons you to should learn that will help you avoid big losses and hopefully help you make some good money!
What’s low can be even lower, and what’s high can go even higher
Although fundamental analysis (FA) tells us that every stock has an intrinsic value, in the world of trading – especially intra- day trading – one must learn that the market holds few absolutes. A common comment you hear from newer traders and even some older ones is “Oh you should buy stock XYZ because it used to be $4 and now its only $2, what a steal!”
There’s only one problem with that way of thinking and that is that a stock that’s cheap today could be even cheaper tomorrow, buying a stock just because it used to be worth more ignores changing market sentiment and fundamentals. Vice-versa, buying a stock that’s expensive can still make sense if the momentum on that stock is strong and it still has a ways to go.
Key Lesson: Don’t get too hung up on the past performance of a stock or currency pairing. Remember, past performance is not a sure fire indicator of future performance
Anyone can get into a Situation, knowing how to get out of it is far more difficult
Before getting into a trade, you should have a strategy that dictates your overall position. Know when you’re going to enter a position, how much losses you’re willing to take on that position and the price at which you’ll close the position. Most importantly, learn to follow that strategy. The market is littered with traders who lost money not because they had bad strategies or ideas, but rather because they weren’t disciplined enough to follow them.
Anyone can enter a trade – if they have enough money – knowing how to get out of it in a way that controls your risk and helps manage your risk while providing a reasonable return? That is what separates the good traders from the bad ones.
Key Lesson: Always have a plan, and learn to stick with it! Know your potential exit points before you enter into a position, don’t stumble into it and only figure it out later!
If there is nothing to gain, I have everything to lose, If I have nothing to lose I have everything to gain.
When looking at a stock, or Forex pairing, always remember that if there is little to no upside, then you have little to nothing to gain, and almost everything to lose. Vice Versa, if you have little to nothing to lose, you have a lot to gain.
Above all else this statement is one of risk, the ideal trade is one where we can minimize risk and maximize return, always know what you have to gain and place it in relative terms against what you have to lose. Good traders understand this an know that their job is to manage risk first and make money second.
Key Lesson: Always be aware of the risks you’re about to take! Avoid trades where you know there’s little to gain and a lot to lose if things go against you
Trade but only when it’s the right time to do so, don’t trade for the sake of trading.
It’s important to remember that the goal of all trading is to make money. Make Money. Remember that, its not about who can put in the most trades, or who can stay in front of their screen the longest. The best traders that I have met, don’t necessarily trade often, but they trade when the opportunity they’ve been waiting for has finally arrived.
New day traders tend to make this mistake, misunderstanding activity as measure of profit. The truth is a person only has so many good trading ideas in a year, and should only act upon those ideas, because the others are just going to lose money instead.
Don’t overtrade, you’re putting yourself at unnecessary risk. Trade when the wind is in your favour, and you know how the waves are going to hit. Only then can ride the market to profit.
Key Lesson: Only trade when you have a clear idea about what you’re doing, don’t be too anxious or get caught up in too much hype. Its not the person who trades the most, it’s the person who makes the most that is the better trader.
With that, I hope we’ve been of some help to anyone who trades. Think this article might be helpful for a friend? Share it! Disagree with something we said? Share your view by leaving a comment below and we’ll discuss it.
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