In the past ten years, the stock market average return was ~10% annualized when taking the S&P 500 as the reference point. The great news is that this return is higher than the inflation. Still, inflation reduces the value of the gains, and that’s why investors consider getting into active trading of stocks instead of investing only in the long term. How does stock trading work, and what does it take to become successful in this business where anybody wants to be the best? Do you have what it takes?
What Is Stock Trading?
Stock trading is the practice of buying and selling shares of a company. Ideally, profits are made by buying shares for a low price and selling those shares later for a higher price.
Buying and selling shares is common for investors but also traders. Yet, there is a difference between stock investing and stock trading. An investor buys shares to invest in the long term, holding a position over months, years, or even decades.
A stock trader is a more active market participant who manages more buying and selling transactions than an investor.
Understand The Types of Stock Trading
There are three kinds of stock trading types – day trading, active trading and swing trading.
Day trading means a trader holds a position for a couple of minutes or even just seconds. Day traders use the best stock screeners for day trading to find stocks quickly before others do to ensure the best possible trade entries. Typical charting time frames for day traders are the 1-minute and 3-minute charts, and the most frequently used chart type among day traders is the candlestick chart.
Active trading means that the trader is still interested in completing multiple transactions per week. However, he holds the position longer throughout the day. Some trading strategies for active traders include trading around the open and holding a position until shortly before market close by using a 15-minute chart.
Swing trading is often the ideal solution for people working full-time while parallelly looking for ways to participate in shorter-term moves in the stock market. A swing trader typically holds a position for a couple of days and makes trading decisions based on 60-minute or 4-hour charts. Many find this type of trading most enjoyable since it requires less screen time and fewer mistakes can happen, which makes this type of stock trading attractive for beginners.
Learn How To Trade Stocks
Preparation for actively trading stocks is more complex than investing in exchange-traded funds, but it is not complicated either.
Open a Brokerage Account
Trading stocks requires opening and funding a brokerage account.
There are two types of accounts: cash accounts and margin accounts. The difference is that in cash accounts, it takes 1-2 business days until the funds from sold stocks are settled and credited back to the account so that the funds are once again available for trading. The more convenient accounts for traders are margin accounts. They immediately credit the money as soon as the position has been sold. In addition, margin accounts allow traders to trade on leverage.
Define The Risk Tolerance
As an investor, you learned that it’s necessary to split risk by investing broadly in multiple stocks. Active stock trading is less about diversification of investment rather than defining the risk per trade you can afford to lose.
The best preparation is ensured by defining the trade entry parameters of the trading strategy, along with the stop loss level and profit target level.
As a beginner, it is crucial to keep the absolute amount of risk per trade low until you gain experience and knowledge and make reasonable profits before raising the risk tolerance.
Learn How To Trade
As a beginner trader, you need to learn how to trade. First of all, it’s important to learn to handle the trading platform of the online broker. Placing long market orders, stop loss orders, and profit target orders need to feel like the most natural thing. Also, gaining knowledge about the stock market and trading is helpful to gain an edge.
Practice Trading Without Monetary Risk
Thankfully, most brokerage platforms include a risk-free paper trading functionality, where you can trade with virtual money. That’s great because it lets you buy and sell stocks in a realistic environment. You can try what happens if you click to buy buttons, place trailing stop orders, use bracket orders and try different trading strategies.
Have Goals and a Plan and Start Trading
Having clearly defined goals, a trading plan and the right trading strategies increases the chances of success. Once you are consistently profitable trading within the virtual environment, you are ready to trade with real money, but start small and stay focused. Rome wasn’t built in a day, and your wealth also takes time to grow. Give yourself the room to get better, be open-minded and set realistic goals to become successful.
Article presented by Alexander Voigt
