Trading may sound like an enticing profession: no need for a specific educational background, the potential to make quick money online with just a few hours of daily work, and minimal human interaction. Especially in a pandemic, the idea of a job that can’t be lost is appealing.
However, it’s important to note that trading isn’t as straightforward as it might seem at first glance. An expert with over 17 years of trading experience is here to share insights and lessons learned on this journey.
So, whether you’re considering a full-time or part-time trading venture and have little to no knowledge about the stock market, this guide is here to help. By the end of this article, you’ll have a clear starting point for your journey into day trading. Plus, stay tuned for a Bonus Tip to help you avoid common mistakes and prevent losing your entire investment on your first day.
First, let’s start by understanding, what is trading?
In the Stock Market, there are two major types of participants: Investors and Traders.
Long-term Investors (like myself) identify good companies and hold their stocks for years, hoping that their value will increase over time.
But Day Traders buy and sell securities and sell them on the same day with the goal of making a profit.
You might’ve heard that statistically >95% of traders lose money. Because trading is risky.
So if you are a beginner, here are the six things you can do so that you don’t commit the same mistakes as those 95%.
Step #6: Follow the News
What’s interesting is that all types of news—Local, National, and International—have the power to affect the Stock Market prices.
News like Vaccine Production, Company Merger, Rupee vs. Dollar rate, Union Budget, Elections, and even Rain Predictions.
So as a beginner, your job is to first follow news regularly and observe how it is impacting the stock market prices, which companies are getting most affected, and how.
Now, the question arises: what kind of news resources to follow?
So don’t go by news sites that are recommending you buy or sell a certain equity, but rather pick news sources that are a little bit more objective about data.
There is a website called Screener. which is decent. Finshots are great. Finshots put financial articles in a manner that simplifies.
But I would say you can find everything for free out there. There is no reason for you to pay 2000 or 3000 USD per month to get a Bloomberg terminal.
If you were to look and research, you would find free sources which are very good.
The most obvious free source is Google News. You can follow the business news in particular.
For company-specific news, check out the screener. in or Ticker.Finology. in and Finshots newsletter for getting your simplified daily dose of the market.
As a beginner, you can start with these, and the more you read, the more personalized your favorite resources you will find.
Step #5: Read Some Books!
There are high chance that you are here because some Movie or TV Series has gotten you interested in the Stock Market.
But if all that trading jargon has gotten you confused, then here are some books that can help…
Try Jack Schwager’s ‘Market Wizards,‘ he has a couple of them. There is ‘Reminiscences of a Stock Operator’ which is decent. In these, traders talk about what they did, so they are quite interesting. They are like storybooks.
If you want to do something more fundamental in nature, you can read Graham’s ‘The Intelligent Investor.’
If you want to do something technical in nature, I think Candlesticks is a good place to start. So maybe Steve Nison’s books on Candlesticks. I’ve left the Amazon links to all these books in the description.
These books will help you understand some basics, a little bit about fundamental analysis, and a little bit about technical analysis, which in turn, you can use to build your own trading strategies, which brings us to
Step #4: Learn Risk Management
You must’ve heard a lot of people referring to trading as… Gambling!
But the difference between a trader and a gambler is… Risk Management.
To give you an example…
Some traders might put all of their trading capital, say… Rs. 20,000 on 1 stock (XYZ) hoping that it’ll go up by 5 points. But they don’t prepare for what will happen if it goes down.
But Risk Management allows you to protect yourself when things don’t go according to your plan.
Let’s ask our expert how he manages his risks so that he doesn’t lose as much, even on those ‘not-so-good’ days.
Very simple rules that I think everybody needs to adhere to…
The more you leverage, the easier and the more likely the odds of you losing the money are. So try to shy away from leverage.
Having a Stop Loss is a good rule. If you are buying something at 100, you might be right 5 times or wrong 5 times. When you are wrong, you need a stop loss. So if the 100 becomes 90, you kind of exit it.
Another great rule out there is to diversify. Never put all your eggs in one basket. If you have 100 rupees to allocate, buy 10 different things… Just stick to Large-Cap, diversifying as much as possible is probably the best risk management one can do.
So as a beginner, here are some things you can learn to control your risks as a trader…
Learn some basic terms and concepts, like… Risk Per Trade, Risk to Reward Ratio, Position Sizing, Risk Capital…
As our expert mentioned, always have a Stop Loss for all your trades. To understand what is Stop Loss and how to place it while you are trading in the Stock Market, watch this video, which shows in a simplified manner how you can enter a trade, along with a Stop Loss. I’ve left the link to this video in the description.
Open a book and journal all of your trades. This will help you discover your trading style, what kind of companies you like trading in, what trading strategy works best for you, and so on…
Yeah, I think journaling your trades is a great idea. It is. I think the entire intention with trading has to be, to be able to learn from what you did wrong, and journaling plays a huge part in it.
As a beginner, you need to understand that trading is not about the money you make, it’s about the money you protect. And the more money of yours you protect, the longer you can stay in the game.
Step #3: Learn Fundamental Analysis
Before I tell you why, let’s first hear from our expert how his trading strategies have evolved over time.
When I started, Fundamental Analysis was what ruled my trading mechanism for the first few years, this was followed by technical analysis, and beyond that I got into a little bit more quantitative stuff. Correlation and Mean Regression when things kind of become volatile very quickly, how you benefit from that. That was followed by Sentimental Analysis. Kind of trying to gauge sentiment.
At the end of the day, the price of a company either goes up or goes down not based on all of the other metrics we just discussed but based on people and sentiment. So I went through these 4 phases largely, each lasting a couple of years. Now, I feel like a combination of the
4 works for me. So yes, Technical Analysis is at the core of trading but if you are new, it’s good to start by understanding how to evaluate the true worth of a company. And what helps you do that? Ding ding ding… Fundamental Analysis.
So as a beginner, here is what you can do… Pick a large-cap company, especially from the sector you are familiar with. Let’s suppose you are from I.T. Then maybe pick TCS or Infosys and add them to your watchlist. On one hand, perform fundamental analysis of this company, like reading their balance sheets, reading about their management… On the other hand, observe how current news is fluctuating its market value. Yup, combine it with Step #6.
Now, how to do this? Again, for that… watch this video, which will help you understand how to add companies to your watchlist.
People might say that Fundamental Analysis is not important for trading… But this will help you understand the personality of those stocks better… which in turn will help you make better trading decisions.
In fact, I want you to comment below and commit to making a start… by telling me, which company you are going to start with first. For example…
Step #2: Avoid Trader Bad Habits
Even before you enter the market, remember to avoid these common traders’ bad habits that make them lose too much too soon.
Some of those mistakes are… Trading based on ‘tips’ or ‘alerts’ from random chat rooms instead of doing their own research. Not following a trading plan and instead, making random trades when the market opens that are driven by emotions like fear, greed, or worse… boredom. Failing to plan for failure a.k.a not doing any Risk Management. And this is a big one… Trading with their Living Expenses, instead of their disposable income.
Let’s ask our expert what bad habits he has observed among traders…
I think all of what you said is a bad habit. But… none more so than leverage. I think that is the biggest killer in the stock market. Don’t try and mimic what someone else is doing or recommending. Generally, if somebody is recommending you ‘BUY’ something, if their trading system was working they would be out there trading and not recommending. You could flip a coin, pick a large-cap equity and you would do reasonably okay. The rules behind it… I think what you do after you buy becomes significantly more important. Don’t let emotions weigh you into thinking… you made the right decision or the wrong decision, but… buy something, put a Stop Loss, retain the ability to delay gratification, follow your rules and I think you’ll do okay trading.
Step #1: Learn how to use a trading platform
Obviously, the first step to trade is to open a trading account and learn how to use the platform.
The reason why I showed you the watchlist today on the Zerodha platform is NOT because I interviewed our expert but because I use Zerodha for investing both in Stocks and Mutual Funds.
Especially because it is India’s #1 discount broker in terms of active clients.
Now, before I give you the Bonus Tip if you’ve liked today’s article… then tell it to the algorithm by hitting that ‘like’ button so that you see more of our articles in the future too.
Sitting on a beach with your laptop, working for just 2 hours every day, driving Lamborghini, and sipping Pina Coladas on a beach! Trading is nothing like that! And that’s unfortunately why most people lose money.
So today’s Bonus Tip is this… With trading, have realistic expectations.
Our expert says, if you expect you’ll make 15%, then you’ll be more likely to achieve that rather than thinking that you’ll make 40-50% which will make you take unnecessary risks that’ll make you lose money.
Don’t get me wrong, I’m not discouraging you from trading. I just want to set your expectations right.
So read books, apply what you have read, build your own strategies, invest little amounts first, and find out if trading sparks joy. Maybe you’ll enjoy being a trader, maybe you’ll discover that trading is not for you and instead, you want to become a long-term investor in the stock market.”