A Beginner’s Guide on How to Trade Stocks
Trading in the stock market can be very profitable if you know what stocks to trade. The fastest way to get there is by having a top-notch trading system.
Trading Systems that work are time tested and proven, they have stood the test of times, and historical patterns play out repeatedly. My favourite systems are Fibonacci Retracement based ones; I find them the most accurate today because of how efficient they are at finding key buying/selling points within a price swing.
When getting started, most people make some significant mistakes, but I will try to cover those mistakes now and give you the basics of avoiding them. The two biggest pitfalls that most novices fall into are:
1) Losing all their money by trading without a proven system
2) Trading stocks not suited for beginners
There are many more tips to follow; see them here.
Get a handle on your emotions
If you have not been trading before, your emotional quotient is high, so this means that you will be overly aggressive in your trades. So when things go against you, which they inevitably will because stock market volatility runs both ways, then instead of cutting losses short and small, novice traders tend to let their emotions get the best of them and start panicking, thinking, “I just lost everything!”, instead of doing what they know that they should have done which is to cut their losses short then they keep on trading more and more until they are left with nothing.
Pro Tip: Never trust your instincts when it comes to your money because you will always put up resistance by trying to talk yourself out of doing what you know should be done. Just do the opposite of what you feel like doing because if you stop taking a trade, maybe it’s time to take one!
Use proven systems to analyse the markets and risk
People need to realise that there are no guarantees in life; every system has its limits. Fibonacci numbers can predict stock market behaviour but not with 100% accuracy 100% of the time. They are very good at predicting key price levels, but even master Fibonacci traders who have studied them for years can have losses. They are just better at minimising their losses when they do.
So the moral of the story is that you can minimise your risk by using a system. To become profitable at trading, the only way is to create an edge over other traders. And this, my friend, starts with proper money management and stops with proper stock screener based on those rules and other criteria that we will go over later.
Pro Tip: Money Management works! It’s tough to become a successful trader without it because most systems fail about 30% of the time, especially those trend-following ones. If you don’t cut your loss short after a few unsuccessful trades, you will be left with an empty bank account.
Use the Fibonacci Retracement Levels
The next thing that novice traders usually do is go to a broker and buy the two most expensive stocks on the market: Emaar and Etisalat. Well, this is not necessarily a bad thing to do, I mean, maybe they might know something we don’t, but you should never forget that buying the top trending stock will always lead to losses since that stock will always trend down for at least 50% of its price movement. This is why Fibonacci Retracement levels work so well. They can show us when high priced stocks reach their peak and start reversing, giving us plenty of opportunities to short them with reasonable risk: reward ratios trading them as they come back down.
To be successful in trading, always focus on the lower-priced stocks. They tend to lead the direction of their bigger brothers and sisters when it comes to breaking out and reversing.
Pro Tip: If you want to trade big caps, consider making counter-trend trades in divergence with your stock’s primary trend. For example, if Etisalat is a downtrend, look for bullish candles inside its downward candles and vice versa for shorting opportunities.