Nowadays, it's much easier to start investing. Gone are the days when you had to call your broker on a wall phone every time you wanted quote updates on a stock price. Modern technology allows investors to buy and sell their positions in a matter of seconds on a computer or mobile device. Despite this unprecedented progress, investing remains a mystery for many. In fact, 90 percent of people who choose to day trade burn through their account in six months or less. Here are five tips on how to prepare yourself before making that first order.
Trade With a Demo Account
Demo accounts are nifty in that they allow you to experience the real investing environment without monetary risk. A demo account gives access to the broker's platform and tools including technical indicators, reports, updates, etc. Consider demoing for at least six months and see how you feel afterwards. If it gets too stressful for you, extend your demo practice until you're technically proficient and mentally prepared.
Acknowledge the Inherent Risk That Comes With Investing
Whether it's stocks or currencies, scalping or swing trading, or trading at day or night, investing comes with inherent risk. Genuinely accepting this fact can save you from significant monetary losses. Some people think that they've accepted risk, but then are unable to close a position when it starts to go south. Approach investing like you're a casino business. Casinos print out returns year after year despite people winning jackpots and big cash prizes every night. The way they make money is by keeping the edge in their favor so that over time they come out profitable.
Find the Right Time and Place
Where and when you invest play a pivotal role in your ability to make money over time. Pick a place in your home where you can sit down and analyze companies without the distractions of kids, pets, and background noise. If you invest with your mobile phone or tablet, avoid buying and selling shares at any time of the day that you want to. Don't just pick up your phone and start investing immediately after waking up in the morning. Some investors only trade during the morning when certain stock exchanges are open while others prefer it as a nighttime activity when volatility dials down. Establishing a ritual can help keep you disciplined and logical in the face of market volatility and unpredictability.
Work on Building the Right Mindset
Trading psychology is a big part of what makes traders a success or failure. Without the right mindset, investors will start to panic when their positions start to lose money. They will start making illogical investment decisions and break their trading plans and goals. Stop losses are foregone and revenge trading and overtrading ensues. Margin calls are followed by repeated deposits to sustain your desired position sizes needed to make back the money you just lost. This turns into a vicious cycle until you find yourself losing one deposit after another.
Write a Plan
This seems to be overused, but the importance of creating a detailed plan cannot be overemphasized. Your plan should cover both the technical and psychological aspects of investing. The technical side should encompass the technical indicators you will be using, such as MACD and Bollinger Bands, as well as your stop losses and profit targets. It should also include what time frames you'll base your positions on and the duration of each position. The psychological side should be treated as a journal from which you write down your mindset and emotions felt when you bought or sold a position. Be as specific as you can when jotting down notes. This information can help you determine what went wrong on a losing position and what investment styles and niche markets work best for you.
Reading through this article and absorbing these five tips doesn't completely guarantee that you'll make money once you start investing. However, it does give you a better foundation from which to make sound investment decisions that minimize risk and maximize returns.