Many get lured by the phenomenal returns of stock markets in hopes of getting easy and huge profits while trading. Trading does gives high returns within small time if executed correctly, but there always a risk of huge loss when one lacks sufficient knowledge. To reduce this risk of loss, it is necessary to learn basics of trading. So, in this blog post we’ll know how can a beginner trade in stock markets?
For trading, it is necessary to understand what technical analysis is. This refers to price and volume pattern analysis to identify trading opportunities. In simpler words, it helps to determine whether the price will rise or fall in the short-term future. This analysis helps to determine which stocks to buy or sell.
For technical analysis, the skill to read stock charts is vital. A stock chart is a graphical representation of an asset’s price over a period. Simply stated, it is a price chart of an asset. This asset might be a stock, commodity, currency pair, index, or a derivative. One can add several tools and parameters in this chart to make decision-making easier. One can access or view these charts through several charting platforms such as TradingView and Investing.com. These platforms with their free subscriptions would suffice the requirements for a beginner as well as an advance trader. To learn how to read stock charts, refer to: How to read stock charts?
Different people are engaged in different styles of trading. Everyone has their own style. It depends upon the personality type, skills, level of discipline, available capital, risk tolerance and expected rate of return of the trader. One can start by copying one’s trading style but eventually their own style will emerge from that.
Different trading horizons include – Positional trading, Swing trading and Intraday trading. In positional trade, traders hold their trading position for about more than a week or month. They capitalize on bigger market swings to earn profits. In swing trading, traders capitalize on relatively smaller market swings. The holding period for swing trade ranges between more than a day to a few weeks. On the other hand, Intraday trading involves squaring off a position within a day before the market closes. Intraday traders take many small positions since the rate of return in intraday trading is lesser than positional or swing trading. However, the capital requirement is also relatively low. Hence, many traders chose to do intraday trading.
As a beginner, one could start by doing any type of trading they want. This is because all of them are the same in terms of input required- patience, adherence to stop loss and faith. This will not develop in a day or two. It would require a couple hundred trades to perfect it. Thus, one should do all if they don’t have a time restriction. So, risk management in trading should be effective and efficient.
Risk management is a very important aspect of trading. Trading is not a gamble rather a game of probability. The probability of winning a trade is about 50-55%. Hence, it is necessary to keep odds in your favour by keeping the losses lower than the profits. Even if a trade goes wrong, one must have the wisdom and mindset to exit at the right time. Following are the main elements of risk management –
Entry & Exit – Entry and exit points in a stock depends on the risk-to-reward ratio of a person. Usually, one should keep a risk to reward ratio of 1:3 to avoid large loss.
- For example – If you find Rs. 1,300 to be a good buy point, you kept your SL at 1% for minimal loss. Then the target should be Rs.1339 according to 1:3 risk reward. One must square off their position in event of hitting of target or SL. With more experience, skill, and knowledge of trading, one can become better and do this full time.
- Stoploss – Stoploss refers to a point or range, where one must close their position if the price touches that point. It is used by traders to limit losses on their trades. Taking the same example as above – The stoploss as per the above example for an entry point of Rs. 1,300 should be Rs. 1,287 or 1% down. As soon as the stock reaches the point, one must exit their position.
- Capital – Now comes the most important question- how much money should a trader put into their positions while trading. This again depends on the risk appetite of the trader. In the beginning, one must put only that much amount of money, which one can afford losing without being financially or emotionally affected. One must make it a habit not to risk more than 2% of total trading capital into a single trade. With time as the confidence, skill and expertise grows one develops the courage and mindset to deploy more capital and make some good returns.
As the late big bull Rakesh Jhunjhunwala says, “I am not afraid to make a mistake. I only want to make one which I can afford, so I can live to make another one.” So, commit only those mistakes which you can afford. At the same time, it is very important to learn from own mistakes. The goal should be to never repeat them. One must also try to observe other’s mistakes and avoid making them.
Avoid some common mistakes most traders make, such as over-leveraging, not following the stoploss, trading on tips, and putting in all their money in a single trade. This all can be learnt and properly implemented if one gets enrolled into a stock market class. Practice makes a person perfect and with virtues of practice and knowledge, even a beginner trader can slowly learn to gain profits. Hence, one must never be afraid of trading. Trading is one such art which might even help you to understand the perspective of life through the lessons it gives. Also, you can always learning trading and technical analysis with us.