Trading the financial markets can be a daunting prospect. As a newbie, you are likely faced with many questions, notably Why trade, What to trade, Where to trade, How to trade and When to trade?
Fortunately, the markets are always ripe for the picking. The first order of business is to recondition the universal mindset that says profits can only be made when markets are rising.
Traditional investors understand that you buy low and sell high. For many folks, investing in indices, commodities, equities or currencies is a linear progression. The asset is bought at a low price and harvested at a higher price. The difference being the profit.
In a modern market setting, this requirement is not needed. The extreme volatility of financial markets ensures that prices will move up and down at any given time. Traders need to be able to capitalize on these market movements in bullish and bearish sessions.
All that you need to do is correctly forecast the direction of price movement with your financial assets to profit off trades. This concept is widely used in derivatives and futures trading.
Here are 5 useful tips to help you trade the financial markets more effectively:
1. Follow news and stick to a select few assets
Weiss Finance expert Wesley Marvin advises traders to read financial news updates, follow the latest economic indicators, and stick with a select few assets. ‘In my experience as a financial specialist, I can safely say that knowledge is key to your success as an investor or trader. The greater your understanding of the financial markets, the more likely you are to succeed. Stick with a stock, commodity, currency, or index that you understand and learn everything there is to know about it.’
2. Remove emotion from your trading decisions
This is a difficult concept to wrap one’s head around, but it’s necessary if you’re to succeed in the financial markets. Your decision-making processes should always be geared towards loss minimization and profit maximization. Traders who get overly excited about their trades run the risk of losses. In all cases it’s important to temper your emotions for maximum yield.
3. Establish a budget and stick to it
The golden rule of budgets is never to trade with funds that you cannot afford to lose. Sage financial advice states that the best traders have 2 buckets of cash: the big bucket is set aside for retirement purposes or strategic objectives, and the small bucket is used for day trading purposes.
4. Use stop losses
Use stop losses when you’re trading financial instruments. Stop losses are designed to limit the haemorrhaging from your account when trades are not going your way. Since it is difficult to keep your finger on the pulse of overall market activity at all times, stop losses are your best protection mechanism against a sudden reversal in market sentiment.
5. Practice with a demo account first
If possible, always practice trade with a demo account before you trade for real money. The trading universe is a complex and unforgiving landscape to those who are not grounded in its fundamentals. Learn the basics of market mechanics, and practice different types of trading strategies on a demo trading platform before you invest real money.
One more thing…
Bankroll management is one of the most important considerations when trading. Try not to allocate more than 1% of your available capital to any individual trade. For example, a $500 bankroll should be divided up into 100 x $5 trading increments. That way, you can safeguard your capital by spreading your investments across multiple assets. This practice will serve you well in volatile financial markets.