No trading for beginners lesson is complete without a lesson on how to recover in the event of a string of losses. How do you grow your stock trading account after blowing it up? Folks, here's a strategy that a trader I know used to grow his account from $2,500 at the start of 2013, to $16,500 as of February 17, 2013. Incredible!
Trading For Beginners
Trading is all about taking a small amount of money and growing it into a lot. But you have to start somewhere. The first step in this trading for beginners lesson is funding your trading account.
Set a goal to put $100 into your trading account each month. Most online brokerage accounts allow you to set up an automatic deposit where your money is automatically taken out of your bank account and deposited into your trading account each month.
The most common question I get asked is: How much money do I need to start investing? You can start with as little as $500. I recommend nothing less than $1,000 to start with because broker fees are such a big percentage of your winnings with anything less. As a general rule, if you open a trading account with $1,000 or less, you don't want to engage in active day trading or swing trading. An account with $1,000 or less is better for a longer term hold so that you keep your per trade fees (slippage) as low as possible.
Trading For Dummies
Trading for beginners can be frustrating because even though you may be hitting 5% to 10% winners with $500 or even $1,000 in your account, it seems like your account really isn't growing. Usually the reason for this is brokerage fees or slippage. You can't use a 5% to 10% target because your cost basis will be too high due to trading fees if you are only trading with $500 to $1,000 dollars. Trading fees are a higher percentage of your total trading account balance therefore, you have to minimize these fees by trading less.
I saw a trading for beginners pdf from years ago that talked about brokerage fees being $80 per trade. Thankfully online trading fees are now around $9 for a buy and $9 for a sell but that doesn't mean you can trade without thinking about the costs associated with each trade.
The next important point when we are talking about trading for beginners is buying stocks.
The next most common question I get asked is: What stock do I buy? I don't feel comfortable answering that question because I'm not a stock broker and I don't have a broker's license. I feel more comfortable telling you what stock I would buy. Really the question is not what stock but rather what type of stock. Hands down the best stocks to buy with the most growth potential are going to be small cap stocks.
A lot of trading for beginners books will teach you how to read a chart or how to use a technical indicator but they leave out the most important question: when you are at the trading for beginners level with a small amount of seed or start up money, what are the best small cap stocks to trade?
The best small cap stocks to trade meet the following criteria:
– The small cap stock must have high liquidity so that you can easily trade in and out of the stock. More than $1 million shares traded per day is a good amount of liquidity. You don't want to get trapped in a thinly traded stock or ETF because not only do they have a tendency to not move very much, but you will not be able to sell when you want to.
– The market cap should be between $10 million and $100 million. If the market cap is less than $10 million, the small cap stock might be a penny stock pump and dump. If the market cap is greater than $100 million then it's probably not going to have regular explosive moves upward. The range of $10 million to $100 million is the sweet zone for small cap stocks that can explode higher.
– A beta of greater than 1. The higher the beta, the greater the stock moves relative to the larger market. The higher the beta, the better, when you are looking for stocks that can explode upward. If you already have a lot of money and are looking for more defensive stocks, then you want stocks with a lower beta. This trading for beginners lesson is assuming you have only $500 to $1,000 to trade and are looking for high growth stocks that can turn your small amount of money into a lot. A higher beta also implies more volatility and more risk. The higher the risk, the higher the reward. Keep in mind that beta is a two-edged sword: it can cut both ways.
– The higher the days to cover on the short interest the better. The higher the short interest is in a stock, the greater the probability of a successful short squeeze. A short squeeze happens when there are lots of short sellers in a stock and after the stock drops, it's at such a bargain that buyers come in to the stock. As buyers push the price of the stock higher, the short sellers begin to lose money and are pressured or squeezed into selling. You can read more about a short squeeze here.
Best Online Trading For Beginners
The best online trading for beginners advice that I can give you is to establish the catalyst before you buy a stock. I can't tell you how many times in my trading for beginners email course that someone asks me what I think about a stock. They show me a great stock chart of an oversold stock that's super cheap compared to a couple of months ago, and they want to know what I think about it. I ask them what the catalyst is and they either don't know what the word catalyst means or they have no idea. They will tell me that the reason they like the stock is that it has bottomed. That's not a catalyst.
Frequently Asked Questions about Trading For Beginners
What is the best trading platform for beginners?
The best trading platform for beginners is Etrade Pro. I use Etrade as the basis for many of my stock trading lessons.
What is the best trading site for beginners?
What is the best trading software for beginners?
What is candlestick charting?
Candlestick charting is the use of Japanese candlesticks, developed hundreds of years ago, to study price action.
TradingAcademyMumbai posted an excellent video on candlestick charting called Understanding Candlestick Charts.
How much money do I need to start investing?
To start investing you need a minimum of $1,000 but $2,000 is better. The reason you need $1,000 is that brokerage fees eat up too much of your account. It makes your cost basis on a stock you buy much higher than the actual market price. With $1,000 you have to take a position in 1 or 2 stocks which is very dangerous. Preferably you should take at least 5 positions at the same time, with each position being nothing less than $2,000. This puts a starting capital closer to $10,000.
One of the biggest mistakes you can make is not starting out trading with enough money.
SimpleTradingIdeas posted the excellent video below called 6 Common Mistakes Made By Beginning Traders.
What is a good online broker to use in the UK?
A good online broker to use in the UK is Interactive Brokers.
If you live in the UK then you have probably discovered that Etrade Pro is not available.
Howardv posted the excellent video below called Broker and Platform comparison: Interactive Brokers and Tradestation. This video is 4 years old and so Interactive Brokers may have updated their online software platform since.
You can be the best chart reader in the world and know how to use a dozen or more technical indicators but if you don't know how to establish the catalyst, you will still lose money trading. Conversely, you can be the worst stock chart reader in the world and not know anything about any technical indicator but if you pick stocks with a good catalyst, you can become a millionaire.
A stock must have a catalyst that can lift it off the bottom and cause short sellers to cover. The catalyst can be a PR about new business or contracts, earnings release, buy-out rumors, sympathy plays, and so on. You must establish a reason for the stock to move higher and if you can't find a reason for it to go higher, then neither can anyone else. The volume will likely decrease in the stock and it could stay low and go sideways for years and ultimately end up going bankrupt. Always ask yourself, what is the reason that will cause buyers to come into this stock and short sellers to cover? An oversold stock that looks like it is at a bottom on the chart is not a good enough catalyst.