However, if you jump into the market without making adequate preparations, you’ll get burned, lose your money, and exit the market like a dog with its tail between its legs.
Trading the markets can be deeply satisfying and financially rewarding but it can equally be frustrating when it seems that you are always on the wrong side of trade.
This piece seeks to provide you with a no-frills guide that can improve your odds of recording trading success.
1. If you can’t do grunt work, stick to passive indexing
Trading the markets on a pro level requires years of dedicated study of the markets, unwavering tenacity in the face of huge losses, and a decent sized trading capital. If you want to trade CFDs, you’ll need to acquire CFD trading knowledge, stock traders will need to master both technical and fundamental analysis, and forex traders will need to become astute economists and political observers.
You’ll also need to master different parts of the market such as stocks, CFDs, futures, commodities, ETFs, and forex. If you can’t devote a cult-like religiosity to learning how the market works, you’ll be better off putting your money in passive index such as the VOO or SPY. The S&P 500 has returned 9.6% per year since 1928; hence, you’ll still book decent profits.
2. Trading is a mental game, bias and emotions are your biggest enemies
Trading is a mental game but the problem is that both logical reasoning and emotional sentiment control our actions. Hence, to be a successful trader, you’ll need to deal with the confirmation bias which tends to cause people to interpret market data in a way that confirms their assumptions. In technical analysis, a stock pattern that indicated a buy six months ago might not necessarily be indicating “a buy” today.
More so, a fundamental analysis of geopolitical trends might suggest that you should buy precious metals or open a new gold IRA account as a safe-haven asset against market volatility. However, your emotional attachment to the rewards from other assets might keep you from taking the proactive step to guard against increased market volatility.
3. Be prepared to pay the costs of trading and taxes
I’m not trying to discourage you, but you should be ready to pay your dues in the literal sense of the word if you want your trading efforts to be worth its while. Starting with the cost of trading, you’ll need to pay commissions to your brokers, you’ll need to pay for market research (chat rooms, newsletters, screening tools, etc.), and there’s an inherent opportunity cost on any trade you enter.
The only certain things in life are death and taxes – you definitely can’t escape paying taxes on your trading gains. You’ll need to pay short term capital gain tax, which is usually calculated at the same rate as your ordinary income. You’ll also need to pay capital gains taxes on assets that you hold for more than one year. When you factor in cost of trading and taxes, you’ll notice that you must have a consistent stream of trading success if you don’t want your efforts to be wasted.
4. One(1) trade can make or break you
Every trade is important and you should approach every trading decision with seriousness and a commitment to profit. You should never underestimate the potential impact of a single trade on your portfolio and your trading career. Your trading experience will be made of hundreds of uneventful trades where you gain/lose a tenner (hundred or thousand) here and there throughout the year.
However, occasionally you’ll see a blockbuster trade that would have the biggest impact on your portfolio. A single trade can account for as much as 90% of your gains or losses for the year; hence, you should be prepared for when the opportunity presents itself.