How to start trading

  • When you’re starting out trading the financial markets, you should approach it much like you’d approach the launch of a business.

    Trading the markets is just like running a business - the goal is to earn revenue but, even more importantly, to make sure that your revenue exceeds costs. In the case of trading, revenues are the highly sought-after winning trades, while costs are generally comprised of the losing trades that occur in market speculation. The difference between revenues and costs is the all-important net profit.

    To become a successful long-term trader, it’s vital to establish good habits from the outset. These habits can assist towards the accomplishment of two goals:

    Goal one - Achieve positive net profit over any given time period

    Goal two - Increase positive net profit as the business grows

    What can help you achieve these trading goals?

    For one, before getting into any trade, you should know and quantify your exit strategy, especially your downside risk.

    Before you enter into any position, you should know exactly where the ‘point of pain’ resides: where the trade must be cut in order to preserve financial health and the integrity of your trading account. Constantly allowing losing trades to go beyond this point is a recipe for failure.

    Another habit exhibited by many good traders involves position-sizing. For every trade, a proper position size should be predetermined according to the size of your trading account. This can contribute to controlling and quantifying your risk.

    Obviously, a £10,000 trading account requires different position sizes than a £1,000,000 trading account. But, with any account size, it can help you avoid large losses if your positions are prudently and proportionally sized.

    Many good traders also have a habit of not rushing into trades. Trading opportunities should be weighed and considered carefully.

    This means that before any trade is entered, a detailed trading plan should be created and adhered to. Traders shouldn’t enter into any trades randomly or haphazardly, based on the emotions of excitement, greed, or fear.

    There should always be rational reasons for getting into and out of market positions. The fact that a market is rapidly moving in one direction or another may not constitute a rational reason for getting into a trade.

    Five key things to remember when you start trading

    1. Trade with the prevailing trend

    Consider taking the path of least resistance and go with the flow of the current market.

    2. Establish a detailed strategy for entering and exiting trades

    A detailed strategy defines parameters for getting into and out of trades so that there’s no ambiguity.

    3. Watch your downside risk and be prepared to act decisively to control that risk

    Make sure that you’re disciplined enough in preserving your trading account so that you can live to trade another day.

    4. Trade with reason, not emotion

    Human emotions (excitement, greed, fear) don’t usually lend themselves well to good trading.

    5. Avoid trading right around scheduled news events

    Trading can become more like gambling around the time of news events, where prices may move drastically within short periods of time. This can exclude the average trader from participating in these moves.

    These are some of the more important habits that you should pay attention to, especially when just beginning to trade the markets. But there are other habits to consider developing, including trading with the prevailing trend and running profits while cutting losses. However, the habits mentioned above will help you build a prudent mind-set.

    Ready to take your learning up a notch?

    Trading Academy mentor James Chen has created a six-part webinar series on how to become a trader.

    Become a trader in six steps