The financial markets are notoriously brutal, especially towards inexperienced traders aspiring to turn their measly savings into livable retirement funds. While the fundamental premise behind trading in the financial markets is simple enough to understand – buy low, sell high – up to 90 percent of traders still fail to make money, most of which end up poorer than when they began this endeavor. Fortunately, it doesn’t take a Finance degree in one of the Ivy League universities to understand financial markets well enough to profit consistently. Here are five tips to getting your big break.
Understand that Each Market is Different
Both in terms of cost to trade, strategies that work, and factors that move it, financial markets are different from one another, and failure to recognize these distinctions can be detrimental to your account balance. Stocks, for example, have a different risk setting as opposed to forex or cryptocurrencies. Within stocks, tech and energy stocks are also relatively different from one another, in terms of volatility. If you are looking to trade currencies, stick with learning and mastering how to trade Forex first before you spread yourself too thinly.
Choose an Approach
When learning forex trading for beginners, you’ll often bump into three core strategies – technical analysis, fundamental analysis, and price action trading. Technical analysis uses historic price data to develop pricing models and predict future currency movements. Examples of technical analysis include the use of moving averages and oscillators. Fundamental analysis, on the other hand, uses macroeconomic factors, such as changes in interest rates and geopolitical relations between countries. Last but not least, price action trading uses naked charts and, at times, gut instinct developed through experience in the markets.
Embrace the Concept of Risk
Risk is ever-present in any investing endeavor, regardless of how prepared you are or what educational background you came from. Risk cannot be removed from the equation, and so you should do yourself a favor and accept its presence before even putting on your first trade. Knowing the presence of risk, allocate only capital that you can afford to lose. As a general rule of thumb, you should start with around $1,000 of your real money to trade in real-time.
Don’t Get Ahead of Yourself
Most times, traders, especially beginners, will have a stroke of luck and win a string of trades consecutively. This makes them overconfident and more likely to trade without any solid plan or basis. Another scenario is that a trader may recognize a similar pattern unfolding in which he/she previously profited from. They get overconfident that the same pattern will unfold precisely how it did the first time. This is a dangerous mindset that can result in significant financial losses over time. Always view trades individually, analyzing all current factors that you’re basing the trade on and making sure your position size takes into account predetermined risk parameters.
Set Up a Good Broker
A good broker who can relay your trade orders without delay is a keeper. Moreover, it’s in your best interest to find a broker who is financially stable and can withstand volatile market conditions. If the British Pound or New Zealand Kiwi drops sharply tonight, can the broker balance its positions and survive the aftermath? Keep in mind that each broker has different roundtrip trade costs, platforms and tools, security infrastructure, and account requirements for account applicants. For instance, some brokers do not allow traders who are based in the United States while other brokers require a minimum of $100 to open a basic account.
Financial markets may seem daunting, but they also hold a plethora of opportunities for making money either on the side or as a full-time income. Beginners should heed the advice above to minimize monetary losses and maximize gains.