Trading is a relatively large and dynamic industry that has many moving parts. But being a trader is not at all easy, neither for beginners nor for pros.
At Day Trade the World (DTTW™), we have been fortunate to see thousands of traders every year. For this reason, we have identified some mistakes and patterns of errors that, especially if made before you start, can result fatal.
But we want to prevent you from making mistakes before you even start your career! In this article, we will look at some of the top things you need to know before you start your trading career.
Penny stocks are not always the best
Penny stocks are small companies whose share price is less than $5. Some of these firms are generally small companies while some of them are former large companies whose share prices have dropped. Further, most of these companies are traded in the over-the-counter (OTC) market or the so-called pink sheets.
Most new traders believe that penny stocks are the best options. For one, it is possible to buy more shares of these companies instead of large-cap companies like Amazon whose shares go for more than $3,000. For example, with $100, you can buy 100 shares of a company whose shares are trading at $1. With the same amount, you can only buy $0.03 shares of a company whose shares are trading at $3,000.
Benefits of large cap stocks
While it is possible to make a fortune trading penny stocks, it is also possible to make money trading large-cap stocks like Amazon and Microsoft. For one, you can do that by using leverage, where your broker lends you money to trade.
There are several benefits of trading large-cap stocks. First, some of these firms are as volatile as penny stocks, meaning that you could make money in them.
Second, these firms are not always prone to pump and dump schemes. This is a situation where a small group of investors decide to pump and publicize a stock and then exit when the shares rise. Pump and dump schemes are reduced in large companies because of their sheer size. You can see how such a situation could mislead a novice trader.
Finally, these companies are followed by large Wall Street analysts, making them have many catalysts on a daily basis.
The second thing you need to know before you start your trading career is on the need for patience. As a full-time trader, We have experienced the need for patience first-hand. Early in our career, We thought that trading was a simple exercise where you bought and sold assets and made money. As a result, We lost a lot of money early on.
But this was a lesson to us!
As a new trader, we recommend that you realize the virtue of being patient early on. This means that you should take time doing the following:
- Learning about the market – Understand the various asset classes and how they work. That’s why our training program is so varied and comprehensive.
- Define your goals – Spend a lot of time defining your goal or the main reason why you are getting into trading. In this, find out whether you want it to become a part-time or full-time activity. And even after that, having a defined trading plan is one of the keys to success.
- Define a strategy – After defining your goal, take time to define your strategy. Of course, planning a strategy from scratch also requires several attempts. That’s why we provide our partners with a Demo Trading platform with which they can test new approaches without losing a penny.
There are several strategies you can decide to use including scalping, algorithmic trading, copy trading, and arbitrage among others. The process of coming up with a strategy can be a long one. At times, it could take more than 3 straight months to perfect.
Patience is demonstrated in trading in other aspects. For example, you could place a trade a trade only for it to take time before the thesis works out. For example, you could buy a stock ar $10 with a goal of getting it to $15. In this case, the stock could take time before it gets to your target level.
Therefore, like in all industries, it is important for you to understand the virtue of patience before you start your trading career.
Treating trading as a business
A common mistake that many people do is to treat trading as a hobby. This is wrong! In reality, it is necessary for you to treat trading as a normal business. Running your trading operation like a business has several benefits.
#1. Like a good entrepreneur, you will need to have a business plan. A business plan is a tool where you write several things about your business like strategy, source of capital, and goals. Developing a plan will help you become a better trader.
#2. A good business is one that hires the best professionals. Similarly, as a person with a trading floor, you will need to hire a good team of professional traders to help run it and manage it.
#3. Running your trading operation like a business will help you with money management, risk management, and tax strategies. Money management is how you budget and use your funds. As a trader, having these skills will be very helpful to you.
Risk management, on the other hand, is the process of reducing risks while maximizing opportunities, Tax strategies are important because you want to minimize taxes as a trader. Therefore, having knowledge of these strategies will help you become a better trader.
Importance of a team
Teamwork is an important concept in day trading. This is simply because more people have diverse opinions that are necessary to grow. Similarly, in trading, having a team can help you perfect your game. Indeed, this is why a part of DTTW’s strategy is about building trading rooms that have about 5 teams.
If you are an independent trader, you can be part of a team in several ways. For example, you could create a trading team made up of friends or relatives. You could also use social media to find ideas from other traders. You could use platforms like Twitter, Reddit, and StockTwits to grow your community.
The financial market is a dynamic place that has many moving parts. In this article, we have looked at some of the top things that you should know as you start participating in the industry.