Become a Stock Trader!

Posted:Abigail Andrews – Monday, November 26th, 2007

Tips on Becoming a Trader

So you think your ready to begin real trading? Have evaluated your skills and played on the fantasy markets for a few months with a certain amount of success? If so you maybe ready to dip your toes in the Real Stock Market. However, you may first want to be aware of aware of the costs involved, find yourself a broker, and understand the tax implications of investing in stocks. This section will introduce you to some useful information and advice for your first venture into stock market investing.

The first tip I would give you is to only use one third of your speculation fund in your first few months of trading, and be prepared to lose some, if not all of it. Think of it as a tuition fee.

As with many other aspects of life there is no substitute for real experience on the stock exchange, BUT, beware of beginner's luck. You may start in the middle of a raging bull market, a time when shares are generally rising in value. Be objective in your assessment of how well you are actually doing. Don't kid yourself that you are doing better than you are, be realistic, the only person you are fooling is you. be honest if you find trading is not for you, you don't have to do it yourself, but it is worth having a go.

Types of Trading

What type of trader do you want to be? Be aware of the 2 main types of trading:

Day Trading

If you want to make money fast then Day Trading is the only option. Buying and selling shares during the day in the hope of making a quick profit from the daily fluctuations in share prices is the high-adrenalin end of the investment game.

Most day traders don't hold shares overnight. However, day trading leaves you open to the volatility of the markets. Most investors end up losing money because the dealing charges they pay per trade wipe out the profits they make. You really have to be dealing in very large sums to make this kind of investing worthwhile.

Day trading requires constant attention and really full time dedication. If you have a full time job, day trading on a regular basis is most likely out of the question, if you have a job you certainly can't dedicate the time to monitoring the constant changes of particular shares. Day trading is not completely out of the question though, for example, many traders dabble in a bit of day trading when they get a day off work or when they take some holidays away from the job.

It is important to remember reading stocks for day trading is a completely different technique to medium/long term share investing!

I would also suggest particularly as a beginner, though even forever, you leave day trading alone. It is simply too risky! It does not mean that trading is not for you though, as you can pick and choose shares with medium to long term ambition, speaking of which..........

Medium & Long Term Trading

Medium term investments could be just a few months but long-term investors will buy and hope to leave well alone for maybe five years. Short-term volatility in share prices won't bother them, and they won't feel the need to monitor their portfolios on a daily basis. For most beginners, this trading is the most sensible and viable option. This is the type of trading I would recommend.

How many shares should you buy?

The more shares you hold, the more time you must spend monitoring their movements and worrying about them. You can become confused, panicky even, and that could be fatal. You are like a juggler trying to keep too many balls in the air. When you are just starting out I would only contemplate buying a stake in 1 at the most 2 companies. That way you can thoroughly research them and keep an eye on news and influences on their price movements. Don't be tempted to do too much too soon.

Remember Your LIMITS!

Stop Losses

A stop loss is an instruction to your broker to sell your shares when it reaches a certain price. It is designed to limit your loss if a share falls further than you are willing to accept. In other words, setting a stop-loss order for 10% below the price you paid for the stock would limit your loss to 10%.

When you buy a share you should always set a price at which you will sell if the price begins to fall instead of rising. For the average share the stop-loss price should be set between 10-20% below the price you paid. The idea is that if a share price is falling by that much, there must be a reason for it. Better to cut your losses now and then buy the shares again at a later date when they seem to be established on an upward trend again. However, not all shares recover. Companies go bust.

It's also a great idea to use a stop order before you leave for holidays or enter a situation in which you will be unable to watch your stocks for an extended period of time. All investors no matter how experienced can pick a dud. So it makes no sense to hang on to shares that are falling in value. Sticking to stop-losses is one of the hardest disciplines for investors to learn, but you must do it!

Stop loses protect your capital and are the most important part of your investment strategy. Set it too short for the type of stock and you could sell far too early, for example, a particularly volatile share might fluctuate by plus or minus 5% on a regular basis. If you constantly sell when the price hits your stop-loss you'll end up eating your capital away through dealing charges and the bid-offer spread. On the other hand set it too long and you could lose far too much by not getting out soon enough. Don’t set it at all and you could lose everything.

Remember you can move your stop loss at any point and a common strategy is to use trailing stop losses where you move your stop loss up behind the price as it rises, therefore you retain any profit so far, but can stay in to make the most of the price rises.

Limit Orders

To avoid buying or selling a stock at a price higher or lower than you wanted, you need to place a limit order. A limit order is an order to buy or sell a security at a specific price.

Just as with stop loses, it is important to set yourself a profit target. Taking profits is a good discipline, because until the money is in the bank any profit is just notional and it could easily disappear again on the back of a unfavorable company announcement.

When a price is going up it is tempting to keep in, we are human after all and one of our biggest problems is greed, however, ultimately the price will start coming down again at some point. Set yourself a profit aim based on your research and stick to it. Set your limits in your trading account so that the transaction is automatically taken care of.

One strategy is to hedge your bets, sell half your holding, and leave the rest, just in case they do carry on rising. We always hear about an investor who sold too quickly and lost out on further price rises, but if he made a profit that is good and he should be grateful, what you don't hear about is the other investor who got greedy and left it too late and then lost thousands.

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