Trading is another way of getting involved in the financial markets that aims to outperform conventional buy-and-hold investing. In trading, traders look for short-term price moves in order to gain money in both rising and falling markets.
As a trader, you can have all the freedom to work from home, set your own time, and have the chance to grow your money in the most favorable conditions. Participating in the trading industry has come to be so easy. However, becoming successful on it is another story.
Before engaging into trading, it’s important to develop a logical business or trading plan. As a matter of fact, successful traders went through a lot of hard work before their efforts paid off. It takes constant research, evaluation and discipline to succeed in trading.
Also, you need to approach trading as a business instead of a hobby. In developing a trading strategy, you need to identify things like short and long-term goals, the amount of capital that you allocate for the business, your timeline, and many other factors.
Here are some of the things that you should do in developing a trading strategy:
1) Assess your investment goals.
Before participating into any type of trading activity, you need to know the reasons why you want to invest in the first place. Ask yourself, “What do I really want to achieve through my investments? Is this going to be a short-term or a long-term plan?”
For instance, if your goal is to establish a retirement fund, you probably want to invest money as you earn it, and earn an interest rate that is greater than what a savings account could offer. But if you have more short-term goals like saving money for a condominium downpayment, you might consider investing one sum of money and earn a lower interest until you can have the unit that you want.
2) Consider your timeline.
After assessing your investment goals, you now have to take into account your timeline. Decide first whether you are a short or long-term investor. This is because your trading strategy will be different if you’re investing to make short-term profits than investing for retirement or other long-term goals.
Holding a security for less than 3 months can fall under short-term investing. This type of investing is more risky compared to long-term investing. It also does not provide as much returns as the long-term ones. Consequently, long-term
3) Consider your risk tolerance.
Risk tolerance refers to your ability and willingness to go through the market inconsistencies. Most of the time, younger investors have higher risk tolerance due to their longer timelines. Older investors, on the other hand, may have lower risk tolerance.
Aside from risk tolerance, you should also consider your net worth, risk capital, level of experience, and your investment objectives.
4) Determine the type of investments you will make.
You can choose among the different types of investments. The most common ones are stocks, bonds, futures, options, and low grade “penny” stocks. Usually, beginners start with stocks and bonds. Also, do not trade everything. You have better chances at success if you learn and practice in the type of investments that meet your investment goals.
You have to take note that stocks and bonds are less risky compared to futures, options and penny stocks. They also provide much higher returns than traditional savings accounts. It’s wise to diversity your portfolio by investing on different types of investments. This way, you can make up for the losses in case one of your investments is losing.
5) Make a trading plan.
Now that you have determined the most basic investment decisions that you will be taking, it’s time for you to formulate your plan.
First, determine how often will you buy stock, and the time frame that you allocate before you will pull out an investment due to loss. Making a decision on this matter now will save you time in deciding whether or not to sell your stock on a day-to-day basis.
For beginner investors, it’s best to hold the investment for at least 25 days or more, rather than observing the changes in the stock prices every day.
Also, you need to choose the method that you would want to engage with if you choose a short-term trading. You can choose between day trading, swing trading, and position trading.
A good trading plan is objective, concise, and easy to comprehend. It is one that you have researched, tested on historical data, tested in a live market, and evaluate at regular intervals. You have to make sure that all these details are properly laid out before you trade in a live market.
In your research, you need to know the different trading styles, and take into account the trading style that best fits your investment behavior. Again, the factors that you need to take into account are account size, amount of time that can be dedicated to trading, level of trading experience, personality, and risk tolerance. This is where you factor in whether your personality and financial means are compatible with this type of business activity.
After you have gone through all these, you can proceed to researching your stock investments, bonds, options, and mutual funds, and purchasing and trading securities. Each of these processes have their own steps which we will discuss in detail in the next succeeding posts. For now, make sure that you have followed all these necessary steps before you engage into trading.