I have written about different types of stock strategies, and how to choose your broker. This post will focus on trading the market or as Allen Iverson would say, “we’re not talking about the game, we’re talking about practice.”
You have chosen your broker and your account is now funded. Are you now ready to start trading? I don’t think so. While I am definitely no expert when it comes to trading, I do have some experience and a little bit of knowledge about trading. From my experience, my first suggestion to someone who wants to start trading is to NOT trade. Would you jump into an airplane and try to take off without ever learning how to fly? I think not. The stock market is a lot like the Honey Badger. It doesn’t care about you. It will eat you up, take your money and spit you out. If you don’t know what you are doing you will lose money. Even if you know what you are doing it doesn’t guarantee you anything. For this and many other reasons, I suggest new traders to practice trading. Otherwise known as paper-trading.
There are many different ways to paper-trade. The first and oldest way, is to practice trading on paper. Take the stock you want to buy and write down the price you “buy” it at. Imagining you own shares of the stock at that price and see if it goes up. The easiest way to paper-trade is to sign up for a free account at Wall Street Survivor or How the Market Works. I haven’t used these very often, due to TDameritrade having their own practice software, but either way practice is practice. A lot of the practice accounts delay quotes by 15 minutes, so it’s not realistic for practicing day trading.
One big problem that you have to deal with when paper-trading is you have to act like the money is real. This is a hard thing to do. It’s easy to throw money at a stock if you know you can’t lose money. It’s a completely different feeling when you are using real money that can lead to real losses. One of my rules when I trade, is that I only put an amount in that I am willing to lose. Why do I do this? Because there is a possibility that I could lose every cent that I put in. This has actually happened in some of my options trades. You can do all the research you want, which is a thing I like to stress, but that still won’t change the fact that congress could pass a bill that effects a company’s profitability. You can never know if something bad could happen, like if a company will declare bankruptcy (although research should for the most part keep you away from these ones).
You have to think of your paper-trading account like its real money. That means you need to include commissions and any fees that you might have. Follow the pattern day-trading rules (3 day-trades in 5 day rolling period), and act like its money you can lose. Do this for a while (3-6 months) to get a good idea of what your skills are. Analyze each trade and see what you are doing right and what you are doing wrong. Don’t worry if you make a lot of mistakes, it’s going to happen. Just try to fix them and focus on becoming consistent. One of my problems, especially when I first started out, was being too impatient. I would see a loss and become scared of losing more, so I would sell. Give yourself time for the trade to work. I was trying to time the market perfectly. No matter what anyone tells you, you cannot consistently time the market perfectly. Set some rules and follow them.
You can practice forever if you want, but at some point you are going to have to use real money. No amount of practice will make you perfect in the market, but it can help you limit your losses.
Are you one to jump into something head first? Or do you like to learn first, jump later?