Top Five Trading Tips for Beginner Traders

Trading in the capital markets can be challenging. Before you risk your capital, you might consider researching the different techniques beginners can use. Like any other business, you want to ensure that you have thought out your strategy and avoid taking risks beyond what you can afford. Regardless of how much experience a trader has, all trading comes with risk. Therefore, it’s only to your advantage to educate yourself on the ins and outs of online trading. You want to design a trading strategy that fits your personality while avoiding letting your emotions get the best of you. Here are five useful trading tips for beginner traders.

Educate Yourself on the Markets

It’s important to understand that knowledge is key to success. There are reasons that certain stocks, bonds, commodities, or forex pairs move on specific days. The reason is that all the available information is currently priced into the value of an asset. When new data arrives, markets will adjust, and the price will change. To ensure that you know when further information is about to become available, you must educate yourself.

Each day new pieces of information become available. This could be financial data about a company or an economic release such as retail sales or job data, as well as occasions when a central bank raises or decreases its borrowing rates. Knowing when these days will occur can be accomplished by reading the news daily or looking at a financial/economic calendar. You can also educate yourself about different trading strategies used to make money. You want to make sure you do your homework and speculate using educated bets instead of shooting from the hip. You also want to set aside enough time to concentrate on the financial markets.

As a beginner, you may want to focus on a small number of assets instead of overwhelming yourself with larger groups of assets. Don’t quickly move to whatever you perceive is hot or what is getting attention from market pundits on TV. Rather, do your homework in advance and spend a small amount of time watching how the market reacts to certain news events during the trading day.

Start Small and Use Discretionary Income

Another tip is to make sure you only use the money you can afford to lose. The money you need for food and housing should not be used for trading. If you set aside money that can be lost, you will not put yourself in a situation where you need to stop trading because you cannot afford the rent. You also want to start with small trades and not bet a bunch. By starting with small amounts, you will be comfortable with strategies that allow your positions to move against you before potentially moving in your favor. You should be aware that the market generally moves in the direction of most pain, and if your positions are significant, you might be forced out.

Design Some Trading Strategies that Work for You

Trading requires strategies. You want to combine entry and exit positions with risk management. To do this, you can use several plans including trend following, momentum trading, mean reversion trading, and fundamental news trading.

A beginner can learn a few technical trading strategies that will provide you with the basis of a more advanced system.

A trend-following trading strategy is a strategy that is geared toward catching the middle of a trend. A trend is a move in the market that perpetuates. One of the best ways to gauge a trend is to use moving averages. A moving average is a specific period that continues to change over time. For example, a 50-day moving average is the average of the last 50 days. On the 51^st day, the first day is dropped from the average calculation.

A popular trading system defines a trend as when a shorter-term moving average such as the 50-day moving average crosses above or below a longer-term moving average, like the 200-day moving average (chart). When the moving average crossover occurs, it describes a situation in which the currency pair’s price is in the middle of a trend. A trend-following strategy aims to make more on your winning trades by catching the trend than you’d lose on your losing trades. The expectation might be that you will lose more than you win and continue to make money. For example, if you trade nine trades, and 6 are losers, and 3 are winners, you lose $100 on each losing trade and make $200 on each winning trade, you will break even (6*$100 = 3* $200). However, it’s important to remember that no trading strategy is a guarantee, and only intended to provide insight that may help you to make better-informed trading decisions.

A momentum strategy is based on moving averages. It allows you to see the change in a moving average which equals momentum. The MACD (moving average convergence divergence) strategy generates signals when velocity increases positively and negatively.

A mean reversion trading strategy tells you when an asset stretches too far too quickly. The relative strength index (RSI) is a momentum oscillator that tells you when prices have moved too quickly. When the RSI index hits a reading below thirty, the market has declined too quickly and could likely bounce. When the RSI moves above an index level of 70, prices have likely increased too quickly and could likely stall.

You also might decide that you want to trade based on the news. This type of strategy is less objective and is more subjective, and you might need some time to determine how an asset reacts to good or bad news.

In each type of trading strategy, you need to have a risk management feature. Risk management tells you how much you are willing to risk to reach your financial goals. To make money, you need to risk money. A good strategy will have a robust risk management strategy. You might decide you are willing to risk 1% to make 3% on a trade or 15% to make 30% on a strategy. Before trading for the first time, you should have your risk management plan down. For each strategy, your risk management could be different. For example, the risk management for trend following might be different from that of mean reversion.

Keep Your Emotions in Check

Regardless of the strategy, you need to understand that trading is a business, and there will be winning days and losing days. If you allow greed and fear to get the best of you, you will likely be unsuccessful. If you design a strategy and stick to the strategy, you can follow your design without emotion. If it does not work, you should return to the drawing board. Make sure you give your strategy a chance and avoid pulling the plug too early. Additionally, you do not want to get married to a particular trade and let your losses run. It would help if you also take profits when the market reaches your expectations.

Use a Demo Account

Another trip for beginner traders is to use a demonstration account before you start to trade using real capital. If you are looking into what is CFD trading, you will likely find access to a demo account. A demo account is an account where the money is not real. You get to trade on a platform the way you would trade if you had real money in the account, but you will not lose anything. Practicing is a good way to get a sense of how the markets work and spotting potential opportunities as they happen. You can see and feel what it is like when a trade does not go your way, and it will help you keep your emotions in check when you switch to real capital.

The Bottom Line

The upshot is there are some good tips for beginner traders to follow to try to provide them with the best chance of success. Educating yourself by following the markets and making time for analysis gives you a better chance of success. If you treat trading with disregard for education, you are bound to experience inconsistent returns.

You also want to design some strategies that fit your trading personality. Within those trading strategies, you want to incorporate risk management that will put a cap on your losses. Having a good strategy will allow you to keep your emotions in check. You can also practice using a demonstration account to test drive your trading strategies without losing real capital.