If you’re new to trading it’s important to go into it with your eyes wide open.
Trading is a very high risk form of investing and it’s not for everyone.
Yes, it is possible to make quick profits using margin trading to leverage your risk capital.
But it’s also equally easy to lose all your money in the blink of an eye.
Here are five things you need to consider when starting to trade. The list is not exhaustive, as there are many many aspects to being a good trader. These though are the top five worth highlighting very early on.
1. Find a decent broker
There are thousands of brokers offering CFD trading and spread betting around the world. Some focus on customer services, some focus on discount pricing, some focus on auto trading strategies and some are based off shore and only exist to scam greedy traders out of their money.
Also, when a broker is regulated by the FCA, some of your funds on deposit are also protected under the FSCS compensation scheme.
If you trade with an offshore broker you have very little protection if something goes wrong.
Unregulated brokers may try and hard sell you to trade more by giving you trading ideas and phoning you up. this should ring alarm bells. Never deal with any brokers that pressurises you into trading.
2. Be realistic and have a clear objective
Don’t think you are going to become a millionaire overnight, or even at all. Be realistic in what you are trying to achieve. The biggest hedge funds only return investors a few percent each year – so why should you as a novice trader be able to double your money every month?
If you think it’s possible to make a living trading if you’ve only got £10k in your account you’re dreaming. Even if you double your money over the years that’s still only an income of less than £1,000 per month.
3. Never trade with money you can’t afford to lose
As above – you should really only assign at most 10% of your investment portfolio to high risk self directed investments. So if you’ve got overall investments of £100k then £10k would be a suitable amount for trading.
Even then, if it’s £10k that you have ear-marketed for something specific in the future like a house deposit then keep it away from the markets.
4. Use stops, run your profits and cut your losses
Without fail, use stop losses. A stop is an order that automatically closes your positions when a loss has reach a certain amount.
They help because you don’t have to keep your eyes on the market all the time and take emotion out of taking a loss.
One strategy that new traders never stick to is running profits, which means when a trade is going well, don’t rush in and take profits too soon.
Likewise, don’t be stubborn and think that a losing trade will turn around.
In 20 years of being a broker, I’ve seen all sorts of traders. The ones that do well stick to those principles.
5. Understand the market
Never trade in something you don’t understand.
I’m not saying you need to be an expert on economic theory, but it’s very easy to kid yourself into thinking you know what a moving average is or can spot charting patterns.
Before you put on any trade ask yourself the question: “Do I really know what I’m doing?”
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Richard started the Good Broker Guide in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously acting as multi asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2000.