Learn how to become a Trader
To become a trader, you must learn trading basics and advanced trading skills. Once mastered, you can learn proven strategies and gain experience implementing them.
Also, it’s important to be realistic about this profession. There is no perfect trading method that consistently produces only winning results.
However, if you practice learning to discriminate accurate information from what is incorrect or misleading, you can spend most of your time focusing on knowledge that will make you a more efficient and profitable trader.
Basic notions
If you don’t have experience investing on your own, getting started can be quite intimidating. It can be difficult to determine how much of your money should be in stocks, what type of stocks you should look for, or what common beginner mistakes you should avoid.
With that in mind, here are some tips that all investors should keep in mind as they prepare to buy their first stock.
Read books on the subject. The more the better! It is extremely important to know the market before investing your money.
Have a business plan. That is, a set of written rules that specify a trader’s entry, exit and money management criteria. Using a trading plan allows traders to do this, although it is a time consuming effort.
To be successful, you need to approach trading as a full-time or part-time business – not a hobby or a job. As a hobby, where no real commitment to learning is made, trading can be very expensive. As a job it can be frustrating as there is no regular pay.
Trading is a business and incurs expenses, losses, taxes, uncertainty, stress and risk. As one, you must look at yourself as a small business owner and must do your research and strategize to maximize your business’s potential.
Advanced Fundamentals
One investment rule you should live by is this: if you can’t clearly explain what a company does in a sentence or two, don’t invest in it.
For example, I don’t really understand most biotech companies (in fact, I haven’t even tried), so I’m not going to invest in their stock. On the other hand, the business models of my biggest equity holdings like Realty Income, FedEx and Google are pretty straightforward. It’s important to only invest in businesses that are easy to understand, especially when you’re just starting out.
By learning the basics, traders determine whether they want to trade stocks, futures, options or forex trading. By making this choice, they can delve deeper into trading fundamentals specific to that market.
There are several red flags to look out for when choosing stocks. Just to name a few, beginners should avoid the following types of actions
- Companies that make no profit
- Stocks whose stock prices seem to always go down (see the three or five year chart)
- Companies that are under investigation
- Companies with a lot of debt
- Stocks with recent dividend cuts or shaky dividend history
Before buying a stock, it’s helpful to know how volatile you can expect it to be, which you can determine by looking at its beta (included in virtually any stock quote). A stock’s beta essentially compares its volatility to that of the overall S&P 500 index. If the beta is less than one, the stock is expected to be less reactive to market changes, and if it is greater than one, it is more reactive.
For example, if a stock’s beta is 2.0 and the S&P 500 is down 5%, its stock price could drop 10%.
Books on business and instructional websites can offer information and lessons on these and other more advanced basic topics.
Never stop learning
As a seasoned investor, one of the most valuable lessons I’ve learned is that I’ll never know everything about investing. The smartest thing you can do is continually absorb information about how markets work, how to value stocks, and other investment topics. If you do, your investment skills will grow over time, as will your portfolio.
Gain experience
Practice isn’t perfect, but in commerce at least, perfect practice makes improvements. You will never get perfect results because not all trades are won even by professional traders. And that’s okay.
As the trader advances and gains more experience, he will likely find ways to improve his strategies or notice other market trends that can be exploited if another strategy is formulated.
A successful trader may also find that a strategy that worked no longer works as well. In this way, it is always learning from its experiences and trying to find better ways to carry out its work. They are simply adapting to changes in the market that may render current strategies obsolete, but provide an opportunity for a new strategy to be implemented.
