By Craig Erlam
Trading has become more accessible than ever. Getting started is exciting, but it’s also the time when you’re most likely to make mistakes.
The worst thing a new trader can do is hide from these mistakes. When things go wrong, it’s tempting to convince ourselves that our approach is correct, and that we were just unlucky or something is conspiring against us – but learning and adapting are part of the process of becoming a better trader and must be embraced.
Here are seven questions you can ask yourself to get started. You can also revisit these on your journey if you feel you’re going off track.
- How much risk do I want to take?
Get to know your risk tolerance before you define your trading approach. Your personality type can play a significant role here – it’s important to stay true to yourself and not attempt to be someone you’re not. By aligning your risk profile with your strategy, you can create a comfortable and less stressful trading environment. There is no fixed monetary value to allocate for each trade – one person might be willing to risk 5% of their account, whereas another might only be prepared to risk 1% or less. A demo account can enable you to focus on other aspects of your learning or test a new strategy without putting any money at risk. Take it slowly, and don’t expect to have the answers on day one: defining your risk appetite is a trial-and-error process that evolves over time.
- Should I make multiple trades per day or invest over the longer term?
The frequency of your trades depends on various factors, including your personality and how much time you have to devote to doing your analysis and trading. If you have limited time, you may opt for fewer trades per day or focus on longer-term investments. Understanding the dynamics of the instruments you trade, such as stocks, currencies, or cryptocurrencies, can guide your decision-making process. Overtrading out of boredom or a lack of clear opportunities that align with your strategy is something many traders have been guilty of at some time or another. Establish a trading routine that suits your goals and circumstances.
- Am I using technicals, fundamentals or a hybrid approach?
There are many different analytical methods – find out which works for you. Technical analysis involves using charts and indicators to identify patterns and trends, while fundamental analysis focuses on evaluating the intrinsic value of an asset based on economic factors. Your trading background and preference can guide you towards using one or a combination of these approaches. It’s important to educate yourself and find something that resonates with your understanding of the market. You can read more about the differences between trading strategies here.
- What technical indicators should I use?
Your choice of indicators will depend on your trading strategy and personal preferences. There is a wide array of indicators and tools available, such as moving averages, support and resistance levels, oscillators like RSI and stochastic, and Fibonacci retracement levels. Exploring these and finding ones that align with your trading approach may take time. Try to avoid overwhelming your charts with too many indicators and focus on finding indicators that complement each other and work for you.
- What should I trade?
Start by thinking about what interests you and what your goals are. Whether it’s stocks, currencies, commodities, or cryptocurrencies, finding an asset that you are genuinely passionate about can enhance your trading experience, because your familiarity with an instrument and its market dynamics can contribute to better decision-making. Aligning your trading with your interests can make the learning process more enjoyable and fulfilling.
- What risk management should I use?
Using risk management tools can help you protect yourself from substantial losses. Stop-loss and take-profit orders are the most common risk management tools, and they can enable you to define your entry and exit points. Setting these parameters before entering a trade, based on your analysis, risk tolerance, and trade ambitions, can help you make more objective decisions. Make sure you are clear on the amount of money you are comfortable losing and manage your margin usage too.
- How should I monitor my trading and improve?
Keep a trading journal to help you continually analyse and try to improve on your performance. Documenting your trades – such as entry and exit points, reasons for entering a trade, risk management and outcomes – allows you to analyse your performance as objectively as possible. It helps you identify patterns, strengths, weaknesses, and areas for improvement. By learning from your mistakes and refining your strategies, you can develop a more systematic and less emotionally driven trading approach.
Take your time and keep your cool
Learning to trade takes time and effort. It’s not something that will happen overnight. Don’t fool yourself into thinking it will be easy or that you’ll start making money right away.
It’s a process – one that requires passion and dedication, and ultimately isn’t for everyone. But these steps will help you to get started, and there are plenty of other educational tools available online to help you become a better trader.
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