A Step-By-Step Guide On How To Start Trading
If you’re looking to start trading the markets, you’ve come to the right place!
There are very few things, if any, that measure up to being a trader.
It’s a fast, exhilarating, take-no-prisoners ride, and if you’ve ever met a trader before you know that its more than ‘just a hobby’.
But before you start, there are a few things you need to get to grips with.
Knowing what to expect, what tools you need, and a few tips, tricks & techniques will help make your trading journey run as smooth as possible.
And that’s why I’ve put together this guide for you.
With so much ‘noise’ out there, it’s easy to get swept up into the internet-ether!
So, simply read below and discover the six things you need to do before you start trading the market.
You Need To Get To Know The Market
Before you get started you need to acquaint yourself with Mr Market.
If you don’t you’ll be sailing blind, and I don’t think I need to explain why that’s dangerous and irresponsible.
The market is made up of numerous stocks, which are essentially small pieces of a company.
The stock price (also referred to as a "share") reflects the value of the company, and its outlook, is determined by the people trading the stock (traders and investors).
Stocks don't have a set price, they continually fluctuate, as there are numerous people buying and selling them.
These stocks are bought and sold during the trading hours of 09:00 - 17:00 every weekday, excluding public holidays, and these transactions now occur electronically within a blink of an eye.
Most buying and selling of stocks takes place during these hours, although some trading does occur outside these hours; it's called pre-market and after-hours trading.
All stocks are abbreviated into something called a ticker.
Tickers are 3 letter codes used to recognize and trade stocks through your broker and trading platform (more on that in a minute).
For example, NPN is Naspers ticker.
APN is Aspens.
SAB is South African Breweries, MND is Mondi's, FSR is First Rand, and so on.
Most traders think that their goal should be to buy a stock at a certain level, wait for it to rise in price, and then sell it.
The difference in price between the two levels is called a capital gain, or a profit.
This action of buying a stock in anticipation of its price rising is referred to as “going long” or a “long position”.
Now, this thinking wouldn’t be a wrong and in a Bull Market (one in which the market steadily rises).
But what makes trading so exciting is that you can make a profit no matter which way the market goes!
When a market or index is heading downwards, it’s called a Bear Market.
And as a trader you can take advantage of this through something called ‘Short Selling’.
Short Selling is a little more complicated than simply buying a share for capital gain.
Short Selling is basically the act of selling share (or derivative) you do not own in the hope of buying them back at a lower price at some time in the future. You pocket the difference as profit.
It’s effectively the opposite of the traditional way of buying (going long) shares or another security.
Unlike buying a share in the hope the price will rise, short selling involves finding an overvalued share and betting that its price will fall.
You borrow the security from someone who owns it, and you pay a fee for this.
When you enter into the trade, you agree a deadline by which you must buy it back and return it to its original owner.
WARNING: Short selling can be very risky.
Well, when it comes to short selling your losses are technically unlimited.
That’s right, you could stand to lose more money than you actually have in your trading account.
When you buy shares, or go long, you’re hoping for the share price to surge higher, making you a handsome profit on your investment.
However, if the position moves against you, that is if the share price drops instead of rising like you’d hoped, the maximum loss you could take is what you paid for the shares (IE your long position).
But when you short sell, the most you can stand to gain is 100% of your original investment (or more if you trade a geared product, but more on that in a minute).
But your losses are potentially unlimited, as the shares could soar (going against what you’d anticipated by going short), which you’d have to cover.
If you decide to short shares (or any other security, such as a CFD), make sure you have strict stop loss levels in place so you know what your potential losses are should a trade go against you. I’ll discuss stop loss levels a little further below, so don’t worry if you’re not sure what that term means…
The next thing you need to do is get familiar with charts, and how prices move.
Learning the basics of reading a stock chart and stock quotes is pretty important for a trader. Click here to find out how you can start reading charts like a pro in just a few minutes!
Establish Your Purpose For Trading
You need to decide what you want from your trading.
Is it just a hobby, are you looking to buy that new sports car, how seriously do you want to take it?
Is it something you want to do on a daily basis?
Do you only want to trade a couple of times a week?
Do you want to spend some time after work doing your research if you have a full time job?
These questions are important as they’ll shape you as a trader, and they’ll show you how you’ll approach the market.
The other alternative is of course buying stocks for the long term…
There’s no right or wrong here.
Do one of them.
Do all of them!
It’s completely up to you.
We’re all different, and you’ll sometimes read how important a “trading personality” can be.
Your trading personality dictates your trading choices, what you’re comfortable with, your risk tolerance and so on.
There are tons of ways to approach and trade the market.
Day trading is taking trades that last less than a day, and sometimes even trades often only last minutes.
Swing trading is taking trades that last from a day to several weeks.
And investing is taking positions (or technically trades) that last many months or even years.
So your purpose is extremely important.
Your trading purpose will shape how you trade the market.
And once you know why you want to trade, you can decide on how you want to trade.
Which brings me to…
The Golden Trading Thread EVERY Trader Needs
I like to refer to your trading strategy as ‘the golden thread’.
I do this because it’s something that links everything that you do.
Ever trade that you make.
And every action you take.
And that’s why you need to master your trading strategy.
A trading strategy is simply a fixed plan designed to achieve a profitable return by going long or short in markets.
It’s how you approach the market.
Your strategy should include specifications for what to trade, timeframes, trade entries, trade exits, money management, and a number of other elements.
A solid trading strategy is fundamental to your trading success.
Basically, at the end of the day your strategy dictates the trades you make.
Not how you feel.
If there is no intention to trade, there is no reason to trade.
Experienced traders also know that trading less often than amateurs is how to grow their accounts.
And that’s what a mastered strategy helps you do: Trade the right trades.
The market is best taken advantage of when you’re confident in your strategy, and when you have no doubts about what it’ll throw it you.
And believe you me, the kitchen sinks comes a lot more often than you’d think.
Do you have a trading plan, system or strategy?
This might seem simple, and it is…
But if you don’t have one it’s probably the main reason why you’re experiencing hard times in the market.
(Remember that statement a few months into your trading journey)
As I previously said, your trading strategy is the golden thread linking every action you do, and every reaction you take.
No plan, no profits.
One thing I’ve also noticed a lot of new traders do is that once they have a strategy, they tend to regard it as loose a guideline, rather than a strict plan.
Not sticking to the plan leads to trading on emotion.
This is a dangerous and slippery slope that ultimately ends in tears.
Emotions = Gambling.
Plain and simple.
Trading on ‘gut feelings’ and making slight adjustments because of them is only the beginning of the pain.
You need to remember that your strategy should be comprised of a strict set of rules, guidelines and hours upon hours of analysis, back testing and refining.
(Yes that last part might sound a little scary, but I promise you it isn’t, and I’ll show you why in a second)
Anything else is just gambling. Which means not sticking to the plan is a form of gambling.
If you apply your trading plan consistently, it’ll give you an edge.
And every time you deviate, you destroy this edge from your trading.
If you’re not 100% confident in your trading plan, chances are you shouldn’t be trading with real money.
You should only ever enter the market once your trading plan yields consistent, positive results that have been back tested, and are based on proper analysis and have been refined accordingly.
Despite what you may have seen or been told, there are no shortcuts in trading.
There is no magic system, no secret indicator, and there’s definitely not a holy grail of strategies.
Please trust me when I say this, it’ll save you YEARS of torment, and more importantly money!
A solid trading strategy is built around you and your personality.
And in doing so it should fill you with confidence, your bank account with extra zeroes, and leave you with no need to deviate…
Before deciding which strategy and approach to pursue, you really should also consider your finances.
The “Money Equation” You Need To Solve Before You Even Start
You need money to trade.
There are no two ways around that.
It’s not to say you need millions, but you do need to start somewhere.
Depending on where you go you’ll hear numerous ideas on how much you should start with.
And with new platforms popping up every day its becoming cheaper and easier to start trading the market.
The thing is, and very few people actually stop themselves to think about this…
“Just because it takes less money to trade, should I?”
For me the answer is no.
And there are two reasons.
Growth and costs.
You see, stockbrokers (which I’ll get to in a minute) charge you for their services.
And these costs, fees and charges eat away into your account.
They’re not huge, but they do stack up.
And not knowing them, taking them into account, and trading around them could mean your account never grows.
Fees depend on where you go, but I always like to think that I want to make at least a minimum of a 5-10% gain to “net out”.
Meaning I want a stock to rise in price at least by that amount before I start making actual money (if I went long of course). Everything prior to that usually goes to your broker in costs and commissions.
The second issue is growth.
Different account sizes dictate different trade sizes (at least they should according to a system or strategy).
If you have R100,000 and trade 5% of your portfolio on every trade that means you’re placing trades of R5,000 each.
If you have R1,000,000 and trade 3% of your portfolio on every trade that means you’re placing trades of R30,000 each.
See the difference?
So for me if you’re trying to trade anything less than a few grand, you’re wasting your time.
3% of R2,000 is R60.
It’s hard to grow an account like that, not to mention you’ll be chewed up and spat out because of fees.
If you want to trade these amounts of money, don’t.
All you’ll do is end up lining your brokers pockets and not yours.
So what is the sufficient amount to start trading with then?
This is a tricky one, as its dependent on you as a trader.
Because everyone is unique and has a different trading personality to the guy sitting next to him, so too will their trading strategies be.
But as a general rule of thumb, I’d suggest looking at around at least R20,000 – R30,000 to start with.
If you’re planning on taking regular trades, an account smaller than this is susceptible to being widdled away by commissions and fees (what the broker charges for trading, discussed below).
Investing is a little different from trading as it sometimes requires less capital to put on longer term positions and have it still be worthwhile doing.
R300 might be great for Unit Trusts or ETFs, but not when it comes to frequently trading the market.
Something else you need to keep in mind is how losses affect your account.
You need to know that taking a loss doesn’t just affect your overall balance, but it affects what you need to do in order to make that money back.
It’s simple math, but it’s something I find most new traders DON’T take into account.
And it’s really something EVERY trader should be keeping an eye on.
You need to be aware of what you need to make back in order to break even.
What if I told you that if you lose 90% you need to make back 900% just to break even!
Your portfolio balance changes once you take a hit, which means the amount of money you need to make back on the smaller balance is more.
A lot more.
Take a look at this chart below which shows you how much you need to make back when taking a losing trade:
Your capital is important, and you need to keep a beady eye over it all times when you trade.
Once you’ve understood that, your next step from here is to then decide on who you are going to send your trades through.
What broker should you choose, and how do you even find the right broker?
How To Find The Right Broker
A broker is basically the go-between for traders and stocks, securities etc.
They allow you to buy stocks from sellers and sell stocks to buyers, and vice versa.
Remember, there’s always a buyer and a seller for every transaction.
As a trader you want a broker that is preferably:
- Low cost (low commissions and fees)
- Reliable (can trade when you want, with minimal system outages)
- Honest (won't steal your money, or engage in dodgy behavior)
- Provides you with tools and research (least important, since there are loads of free tools available online)
There are LOADS of brokers out there!
Thousands upon thousands, who operate from numerous countries looking to get you to trade with them.
Some are better for investing whilst others are better for traders.
Think of it like this.
Picking your broker is possibly the biggest trade of all.
All your money sits with them, and if something goes wrong you could lose it.
This does happen, please don’t think this is some “pie in the sky” occurrence.
Granted it tends to happen more internationally than it does locally, but either way you need to spend the time and effort required researching which broker is a right fit for you.
For this reason alone, I’d suggest looking locally for a broker.
We have some fantastic / world class brokers in SA, and you can more than find what you’re looking for down here.
One thing most if not all brokers offer you with your account is a trading platform.
This is the technology that allows you view stock quotes, see charts, do research and most importantly place orders.
The platform can be as important as your broker choice as you’ll be tied to it.
So you need to do your homework and make sure you are choosing the right one (if that’s how you want to trade).
You can test out the various platforms by opening demo accounts with numerous brokers.
As I previously mentioned a standard stockbroker will act as the go between for you and the stock exchange.
However, a good stockbroker will offer so much more.
They’ll provide advice on the trades you want to place, possibly even give you additional trades, offer competitive fees, value added services, and much much more.
That’s why picking your stockbroker could mean the difference between a cushy account and scraping the barrel.
So how do you find a stockbroker, let alone a good one?
More yet, how do you find the right stockbroker for you?
Well that’s why I’ve come up with this quick four step process you can use to find the best stockbroker for you.
Step #1: Decide What You Want To Trade
Before you decide to open an account you need to choose the instruments you want to trade or invest in.
Do you want to tap into the Forex market, or would you prefer to trade CFDs?
Are you going to trade the JSE Top 40, or would you prefer international Indices?
You need to ensure the broker you're looking at offers exactly what you'd ideally want to trade, and what you could potentially trade down the line as well.
For example, if you want to trade commodities with the idea that you also want to start trading CFDs at some stage, then make sure the broker you're interested in can accomodate these as well.
Step #2: Figure Out How Much You Want To Trade
Different brokers deal with different types of clients.
Certain companies only really deal with investors that have big amounts of money (despite what they tell you), whilst others deal with individuals looking to invest or trade smaller amounts.
Make sure the broker you have your eye on is willing to accommodate you and the amount of money you have to invest or trade.
Step #3: Plan Your Method of Attack
Are you going to maximize your stockbroker relationship, or are you purely going to trade online yourself – You need to choose or decide.
Are you looking for the convenience of picking up the phone and speaking to your stockbroker directly, or would you prefer to trade or just do it online?
The difference between being a profitable trader and a losing one could depend on exactly that.
You need to decide how you want to trade with your stockbroker.
Ideally you want to find a broker that offers you both.
That way if you run into any trouble, or hit any snags, you at least have the option of being able to get your broker on the phone.
Step #4: Find Out What The Broker Charges
Before any costs come into the equation you need to calculate how often you plan to put on any trades.
You can then find the best fit for your trading needs.
Don’t forget to include all the fees that could impact each trade; management and admins fees, what you have to fork over when you sell your shares etc.
And just remember, cheaper isn’t always better!
Better rates don’t always mean a better quality of service, so you really need to weigh up what you get from your brokerage.
How To Blow A R1million Account But Never Lose A Cent In The Process
Trading the markets is a discipline that takes years to master.
Anyone who tells you otherwise is flat out lying.
That’s why you need to be 150% sure before you ever enter the live market.
You need to make absolutely sure that your strategy works, has been tested and back tested, and that you have absolute confidence in it.
And that’s where demo accounts come in.
Demo accounts allow you to trade fictional money.
So you can afford to blow a million-rand demo account, learn the lessons from doing so, and in the process never lose a cent of your money.
That’s why, as you narrow your selection of brokers, you need to play around in their demo accounts, and practice placing trades.
In doing so you can both get to grips with their platforms and you can test your trading strategy and system.
You need to also get used to the various order types available and how the actual platform operates.
Once familiar you can start testing systems and strategies you might want to use.
Place fake money trades based on those strategies and analyze the findings with statistics to see if the strategy is likely to produce a profit.
If you can't make a profit trading fake money, there’s little purpose in wasting real money.
Another thing to remember, producing fake profits and returns doesn’t necessarily mean you’ll definitely make money in the real world.
There are differences between demo trading and real trading!
When you trade the live markets, you have skin in the game, so you behave differently.
Having skin in the game simply means that you’re invested.
It’s your money on the line.
I like to think of it like this.
I love golf.
I’m not particularly good, but I love it anyway.
I remember when I first picked up some clubs and started going to the driving range.
I’d pick up a few buckets and just swing and swing until the sun went down.
Obviously I was practicing to get better.
But every shot I hit wasn’t going on a score card, or didn’t count for anything.
The second I stepped onto a course for the first time made me see the game completely differently!
Every shot counted.
I had skin in the game.
It wasn’t like the driving range where if I shanked a shot it didn’t matter.
Here, if I shanked I shuddered!
And my handicap suffered because of it.
And it’s the same when it comes to trading the market.
It’s very easy to trade money that isn’t really going anywhere, or make calls on things where your own money is not invested.
Don’t get me wrong.
I think demo accounts are the perfect starting place for traders just starting out, and even traders who want to test certain systems, strategies or ideas.
But let’s be honest…
When you trade in a demo environment versus when you step into the big bad market, well it’s a different thing entirely.
When you have skin in the game, you’re held accountable because it’s your money on the line.
And that’s why trading a demo account is a little different trading the market live.
At the end of the day, skin in the game will make you see things differently.
How To Become A Profitable Trader Today!
Trading stocks is exciting!
And if you can do it properly, in the time that suits you and a way that you can do it comfortably…
It can be seriously rewarding!!
Starting to trade is the easy part, being successful is another story.
That’s why you need to follow this guide:
1. You need to get to know the market.
Stocks, charts, positions, how to trade the market...
These are all things you need to acquaint yourself with.
2. Establish your purpose for trading.
Why do you want to trade?
Once you figure this out, you can determine how to do it.
3. The golden thread.
Every trader needs a strategy, it's the cornerstone of their success (and demise).
4. Solve the money equation.
Consider your finances when you start out, and how much you have or need to start.
5. Find the right broker.
Use my four step strategy to find the best broker for you!
6. Practice before depositing money.
Get to grips with your platform and build a profitable strategy. Test it, back test it, and test it again. Something so important shouldn't be taken lightly!
Follow these six points and I assure you the market will be a place you’ll learn to love!
Trading is exciting, exhilarating, and most of all fun.
But when you start trading profitably?
It’s feels like getting paid to do what you love!
Until then, here’s to profitable trading.
The Money Lab