The goal of making impressive returns has always endeared people to trading in the stock and forex markets. However, it should be noted that making money through trading is not that easy because it requires a high degree of patience, research, discipline, and understanding of the markets.
Aside from these aforementioned facts, the volatility and unpredictable nature of trading in the stock and forex markets makes it really risky for average traders. Also, there are risks associated with scam brokers.
There is no formula that can guarantee automatic success in online trading. However, there are some rules which can reduce your risk and increase your chances of getting a good return.
Rule One – Have a Trading Plan
A trading plan explains what you are supposed to do, how, when and why you should do it in the course of your trading. Your trading plan covers the nitty-gritty of your trading system, trade personality, expectations and risk management.
If the trading plan is adhered to strictly, trading mistakes will be reduced to a barest minimum and losses can be minimized. This is because a trading plan will remove any bad decision-making in the heat of the trading activities.
You should also note that your emotion can lead to making irrational decisions in the course of trading because money is on the line. Therefore the best way to prevent this from happening, is to draw a plan for every potential market scenario.
If the right trading plan is in place, every action is spelled out so in the course of trading, you won’t make rash decisions. Modern technology has made it easier to test-run a trading idea before putting your real hard-earned money. The technology platform known as back testing helps you apply your trading ideas with the usage of historical data with a view to determining its viability.
Rule Two – Only Trade with your Spare Money
It is very advisable for traders to adhere strictly to this rule because the systems of trading in the stock and any other markets are inherently risky so traders are never safe from losing everything.
Don’t trade with money you can’t afford to lose because if you trade with most of your funds or all your funds, the harrowing experience that may result from it could be considerable. It will result in financial problems which could result in difficulty in coping with critical expenses.
So, if you are not buoyant enough to have spare money to trade with, you should wait for better days when your finances improve. Ensure that the funds in your trading account are expendable if not, continue to save until you can trade with a spare money. To avoid unexpected disappointment, the funds in a trading account should not be allocated for basic things such as children’s school fees or housing rent.
Rule Three – Avoid using too much Leverage
Borrowing is a major component of online trading. However, overleveraging happens when a trader has borrowed excessively and cannot cope with interest payments, fees and principal repayments as a result of massive debt profile.
If the position is going against the trader, then the broker will require the trader to deposit more money to keep up with the margin requirements. But if the trader cannot deposit that money in time, the broker will liquidate the position to take off that risk from their books. If a trader is using too much leverage, he can end up in bankruptcy i.e.: lose all of his deposited capital as his financial obligations to banks or brokers could be much higher than his actual capital.
Rule Four – Only Trade via a Regulated Broker
A new trader just entering the stock market in South Africa should select a good and reliable stock broker that is recognized and licensed by the Johannesburg Stock Exchange (JSE) as an Equities member/trading services provider.
Additionally, a broker/financial services provider must also be licensed by Financial Sector Conduct Authority, FSCA (the body that regulates FSPs in South Africa) depending on services they provide.
For example, if you are a forex trader, then you must ensure that your broker is authorized by FSCA for forex trading. There are many forex brokers in South Africa that are authorized to accept forex traders.
Similarly, if you are a stock trader looking to trade equity derivatives, then you can open an account with any reputed JSE regulated derivatives broker. Trading through an authorized FSP will reduce the third-party risk associated with the brokerages.
Rule Five – Don’t Relent in Learning
All capital markets are very dynamic markets that change in line with market realities. So, every trader should be committed to learning each day.
Traders should know that due to the dynamism and intricacies of the markets, traders should stay focused and always be on alert because understanding the markets and the nitty-gritties takes time to master. Political, social, international news etc. can influence the markets so the more traders keep abreast with the news, the more they have the ability and knowledge to cope with the future.
Rule Six – Use Charting tools
Traders should learn how to use technology to their advantage for proper direction. They should focus on technical charts for checking the data on every stock instead of relying just on news. Traders can determine the direction of a particular stock price with the usage of technical indicators & chart patterns because it helps to view the trend, whether the stock is going forward or backward.
Rule Seven – Don’t be blindfolded by your Emotions
Lots of traders have been tasting bitter pills of losses in the equity and Forex markets as a result of their inability to control their emotions. Naturally, temptation to resist the lure of quick wealth is not that easy. However, greed increases when a trader hears stories of mouth-watering returns made in the market within a particular period. Greed can make you speculate wrongly or buy shares of unknown firms without understanding the risks involved.
Rule Eight – Always Use Stop-Loss
Stop Loss can simply be defined as an advance order by trader to buy or sell an asset when the price reaches a certain point. It is an order that a trader places with the broker with the aim of limiting the level of exposure to risks or losses. If you quit a trade with a stop-loss, and you record a loss, it is still okay if it is within the purview of the trading plan.
Stop-loss order is mostly used for short-term trading. This tool is very helpful because a trader can use it to avoid the pressure of monitoring a position on a day-to-day basis. As the order gets triggered automatically, the trader then uses the stop-loss order to decide the limits of risk in advance.
Rule Nine – Only Trade Instruments which you Understand
Another vital rule traders should take note of is to avoid trading an instrument they don’t understand. This implies that before using your money to trade in a stock or currency, it will be highly beneficial for you to find time to know the nature of the business the company is in or the events in the country whose currency you are trading.
A trader should also take note of the fact that the price of a stock is affected by two main types of factors: Economic and Psychological factors. Economic Factor: If the financial health of the firm is in good condition, it will record higher profits and the share price will always have higher value vice versa. Psychological Factors: If investors have confidence in the operations of the company, the share price will also attract high value vice versa.
Since a trader’s main motive is to profit from price fluctuations, it is thus imperative for him or her to do some research and understand the instrument & its risks well.
Always remember that trading is very risky. So, you must fully understand the risks of the instruments which you are trading.
Rule Ten – Stop Trading When There is Need to Do So
A trader should temporarily stop trading if his trading plan is found to be ineffective. If you record more losses than you envisaged, it vividly shows that your trading plan is ineffective for that period. This may be due to conditions such as change in the markets or volatility.
We also have an instance where a trader is unable to follow his trading plans. Forces such as extreme stress and bad habits can lead to this. Encountering these kinds of situations is not unusual in trading, so when you find yourself in such conditions, don’t be emotional. Take some time to re-evaluate your plan, the market conditions and make necessary adjustments. If there is a need to adjust, you should do so, it is not bad.
