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What traders need to know

Read our experts' recommendations on what you need to know before you start trading in the financial markets.

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There is no common approach in trading

Most traders believe that there is a formula that can be used to predict market fluctuations. But in reality, not only is there no such formula, but it is not even possible to develop a general model of the markets, because the patterns are constantly changing.

Existing numerous styles and approaches, which sometimes contradict each other, perfectly demonstrate the huge possibilities of stock trading. There are a large number of ways to become a successful trader. But in order to find your way, you need to work hard.

A foundation that will help a trader to prepare well for entering the market:

1.  Information research

Strive to get knowledge and information from all available sources. At the first stage, it will be useful to learn how other people came into trading, how their path developed, what mistakes they made, what trading methods they used and are using, and why they gave up some of them.

In order to avoid basic mistakes, a novice trader should read professional literature. We advise you to start with the following books:

After reading them, a beginner will be able to operate freely with such concepts as stock index, futures, option, fundamental analysis, P/E ratio and so on.

2.  Training

Learn! This is advice for all novice traders. With modern technologies, this process has become convenient and accessible. You can take both face-to-face and online courses at a time convenient for you. In the process of training you will master the skills of working on the stock exchange terminal, learn about all available instruments for investment, their features, advantages of one over another in different periods of the market cycle, get basic knowledge about building your own trading system and approach.

3.  Independent trading

Once you have been trained, mastered all the terminology and the variety of instruments and investment approaches, you will surely come across the main axiom of independent work on the stock exchange: the older you are, the more conservative your approach to investments should be. As you age, you should favor instruments such as deposits, bonds, index mutual funds and some dividend stocks. These instruments allow you to build your investment portfolio several years in advance and only occasionally make changes to it.

More interesting and profitable is the speculative approach. However, a novice trader should realize that here he will face much greater challenges and a higher probability of error. Any speculative trading system can turn out to be a series of unsuccessful deals. A trader needs to develop resilience to such periods, precisely control risks and maintain a systematic approach. Using such market instruments as futures and options, you can significantly increase your capital, but you need to spend a lot of time tracking market quotes and choose the moment to make trading decisions. Practice shows that a combination of conservative and speculative approaches has the best chance of success in the long term.

7 tips for novice traders from Invest River:

  • Each trader must develop his own method that will fit his perceptions of the market in order to trade successfully. An approach to trading that is profitable for one trader may lead to losses for another trader if he does not adapt the method to his own abilities and perceptions.

    Failure can happen to a trader even if he stands behind a successful trader and closely observes everything he does. Such training will allow to adopt some useful habits, but no more. After all, there will be many moments in the future when the second trader will want to do something completely different from the first trader. This is not to say that the trading of one may be less successful than the trading of the other, but they will undoubtedly act differently. A trader needs to learn to be himself in order to trade successfully.

  • When the opened trading position is very large, traders often exit trades during minor corrections in which they could have made substantial profits. This happens because of fear that dominates over reason.

    This means that position sizes should be reduced until fear no longer controls your mind. Even if the market is moving in the right direction, using only part of your capital in trading may end up being more profitable than if you invested all of your capital

  • If an experienced trader feels that he has made a mistake, he closes his positions and may even open positions in the opposite direction. For example, in April 2009, O'Shea was skeptical about the financial outlook, but the market soon showed dynamics that convinced him that he was wrong. Therefore, O'Shea considered another option to explain the price fluctuations: markets were recovering along with Asia. It would have been very expensive to stick to his previous view in such an environment, as both the stock and commodity markets began a rally that lasted for many years. Only O'Shea's flexibility helped him to admit that his initial conclusions were wrong and to reject the wrong decision. His flexibility allowed him to close the year with a profit.

  • This advice is very trivial, but many traders don't follow it. Very often you can find cases when a trader manages to find a successful trading style, but he gets bored and starts making side trades, not quite understanding what he is doing. As a result, the final performance decreases. Trader must focus on what he is good at and concentrate on those trades in order to make profits.

  • A trader needs to have a significant amount of patience to wait for trades that he is confident in. This increases the number of profitable trades. Long-term investors prefer to invest in questionable trades rather than wait for an attractive investment opportunity. The result of this approach is that they often have to close these questionable trades with losses to themselves when the opportunity to invest in a profitable trade arises.

  • The reaction of markets to news can be more important than the content of that news. According to Piatt's recollection, during one of his trades there was an endless stream of bad news. He expected this position to close at a loss after each piece of bad news, but the price did not fall despite the expectations. Eventually Piatt decided that this (the fact that the market was not reacting to the news) confirmed his trading idea and increased the size of his position to four times its size. This trade brought him one of the largest profits in his history.

  • Low volatility does not always result in low risk, and high volatility is not always accompanied by high risk. Investments that have a high potential risk may show low account volatility if no risky events have occurred during the entire trading period. Selling out-of-the-money options can show low trading volatility if there were no strong price fluctuations during the trading period. But in case of a total sell-off of assets in the market, there is a risk of serious losses.