You may have noticed that the buy-and-hold strategy has not been as successful as it used to be. Trading is another way of making money on the stock markets but does it really work?
The term trading can be used for a wide range of activities, day trading and Forex trading have become very popular topics on the Internet. Nowadays, small investors can trade in almost anything. But in many ways, share trading is the safest for beginners.
Day trading has been popular for a long time but study after study have shown that most day traders lose money. This even if the market is moving upwards. Profitable day trading requires quick decisions, an extraordinary discipline and a deep understanding of how markets move. But the main problem with day trading is that the gains made on winning trades are very small. This means that day traders need a high ratio of profitable trades in order to make money. Although broker commissions have decreased, you still have to pay commissions regardless if the trade was profitable or not. The commissions are another reason why day trading is very difficult to make profitable.
A long-term investor on the other hand can often make 50% or more on a successful investment. As long as such a investor makes sure to cut his losses, it is possible to make handsome money even the investor picks a winner less than every second time. Also a trader improves his chances of success by holding on to his winners as long as possible. In other words, cut your losses and let your profits run. The longer time horizon has another advantage, you can make your trades once a day, in the morning before the stock market opens or in the evening after it has closed. This way you don’t need to worry about the daily volatile and don’t need to watch the prices all day long as a day trader has to.
But even with a longer time horizon, profitable trading is far from easy. If you are a beginner, it is highly recommended that you start with paper trading, meaning that you are not investing any real money. It may not be very exciting but it is very important to learn how the markets move. Once you have worked out a strategy which is profitable, you can start trading with real money. But note that it is important that your strategy is profitable over a longer period of time, not just a few weeks. Trading is not a fast way to riches, you should at least paper trade for six months before you start trading with your own money. Note that you must include the broker commissions also when paper trading. You are not paying any commissions of course but you will once you do real trading.
During the paper trade time, you should also make sure that you have the best tools you need for successful trading. You don’t really need much, just one program which keeps track of your profits and losses as well as trading software. Be careful with magic trading software that is supposed to automatically pick winners for you. Such programs don’t exist. All you need is a program that automatically downloads the market data and displays the data in a way you like.
As a trader, you should always use a discount broker. Even if you are not a day trader, you need to minimize your broker commissions. Trading requires frequent buying and selling so low commissions are essential. One last thing to remember is that it is impossible to always make money on the stock markets. If your trading is going badly, take a break and reconsider your strategy before you start trading again.