Trading stocks to earn a profit can be a promising prospect yet prove to be a daunting venture.
Most newbies are faced with different challenges that make them full of questions such as what to trade, why, where, how, and when to trade.
The good thing is that the markets never run short of opportunities for anyone to earn short-term income.
So, you need to recondition your mindset and not go with the notion that profits are only made when markets are recovering after taking a dip.
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The conventional approach to trading sets you on a path where you buy low to sell high.
Given such standards, investing in commodities, currencies, indices, and equities is thus a linear progression for most people. They will acquire assets that are at a low price and then sell when prices are favorably high; the difference is the profit.
Today’s market offers a better way of playing the game. It is very volatile and that instability means that prices can go high or low at any given time. As such, traders should find ways of capitalizing on the fluctuations to make profits.
You can use trading strategies such as price action trading so that you can make profitable trades. It is a concept that most traders use in trading stocks.
Stock Market Trading Basics
But before we get into price action trading, you may find the following tips useful when trading in the financial markets and it will serve as an intro to stock market trading.
1. Use modern investing tools
You should be aware of financial news and get updates on various economic indicators so you can invest smarter.
I personally use the Atom Finance app to make informed investment decisions with cutting-edge tools including valuation metrics, historical financials, detailed analyst consensus estimates, SEC filings and transcripts, corporate events, curated news, and more.
You can also use this app to track all your investments in one place, in real-time. Once you link your accounts, you will be able to see your real-time P&L, returns, holdings, trades and portfolio statistics. Anyone looking to start trading stocks should download it for free.
Other top stock market news websites to follow include:
- MarketWatch (stock market news)
- Investing.com (stock market quotes and Financial News)
- Seeking Alpha (stock market analysis)
- The Motley Fool (Investing and Stock Market News)
No matter what investing tools you use you should start small, investing in a few assets and sticking to a particular currency, stock, index, or commodity while learning the ropes.
The best strategy would be to be informed, gain knowledge about various stocks within an industry (for example, follow EV stocks like Tesla, NIO, and XPEV) and existing trends in the financial market so that you make smart choices and decisions that set you on the path to success.
If you are working with more than $100K you would benefit from learning about the best ways to invest $100K safely.
2. Remove emotion when trading stocks
It may be a hard concept to swallow, but it is one of the secrets of success when trading in the financial markets.
For example, there have many times when I had a bad day trading stock (down a couple of g’s for the day) and I would make trades I wouldn’t normally do just to break even for the day. I was trading on emotions, which usually leads to more losses since I’m not level headed.
The decisions you make should always focus on making profits and minimize your losses. Never stray from your trading strategy because you want to break even, are getting greedy, or otherwise.
It is crucial that you avoid getting overly excited when making a trade to minimize the risk of making losses.
Temper your emotions so that you make your choices and decision with a clear mind.
3. Set a budget and stick to it
With it comes to setting a budget, the general rule of thumb is to trade with money that will not make you feel the pinch when you make losses (which is very likely if you are a beginner).
You should have two buckets of investing accounts – one is for strategic objectives or retirement funds while the other is for day trading, which should be smaller than the former.
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4. Use a stop-loss order
Make use of stop-losses orders when trading because they will help you stop the persistent hemorrhaging of your finances when trades take a dip.
It can be hard keeping tabs on the overall market activity, stop-losses are there to shield you from the effects of unexpected reversal in the financial markets.
A stop-loss order is an order placed with a broker to buy or sell a security when it reaches a certain price. Stop-loss orders are designed to limit an investor’s loss on a position in a security and are different from stop-limit orders.
5. Practice with stock market stimulators
You never run before you know how to walk, conversely, you should not be too quick to trade in the primary trade platforms before you learn the ropes in a demo account.
Practice makes perfect.
Use a demo accounts to learn how to trade stocks before you start investing using actual cash.
The best stock market stimulators are:
- Thinkorswim by TD Ameritrade
- Bear Bull Traders Simulator
- Warrior Trading
- NinjaTrader Free Trading Simulator
6. Use bankroll management
Just because you have a lot of money to trade in the stock market, doesn’t mean you should go all-in on one trade.
As you trade stocks or begin day trading, consider the significance of bankroll management in your efforts to make money.
Avoid investing more than one percent of your capital in a single trade.
For instance, if you are dealing with a $500 bankroll, then divide it into 100 x $5 in trading increments.
So, spread your investments across different assets, that way you will be protecting your capital.
It is a practice that will cushion you when the financial markets become volatile.
7. Don’t overtrade
Once you get the hang of day trading and you start consistently making an income — you will have good days and bad days.
If you start the day and make a few day trades and end up with a profit — go ahead and call it quits. Don’t over trade and when you’re up, take your profits and go for a walk or develop another income stream.
Better yet, do some research and new tactics, find good stocks to buy or even take a look at Bill Gates’ portfolio to see all of his 24 holdings analyzed to get some new direction.
Why Should You Learn About Price Action Trading?
So how can you make money trading stocks in the short-term? One popular trading strategy is price action trading.
Price action trading is now one of the best trading strategies in the world. If you do extensive research about day traders, you will slowly begin to understand complex trading strategies will never help you to become a successful trader.
You’ve probably heard that new traders generally always lose money in the stock market, but why?
This is only because new traders never realize success lies within a simple approach to trading stocks.
The more you will learn about price action trading the better your odds will be in learning how to trade stocks for income in the short-term.
However, there are a few key factors for which you should be aware of before considering using price action trading strategies.
1. Price action traders trade smart
How many traders can say they can trade with a very tight stop and still manage to make a decent profit from this market?
Very few traders can say this with confidence. As a price action trader, you will learn how to execute high-quality trades at the key support and resistance level with the extreme level of precision.
Things are not easy when it comes to day trading or swing trading in the short-term.
But if you do some extensive online research you will slowly understand the use of tight stop-loss order is one of the best strategies to employ in order to minimize heavy losses or becoming a bag holder.
2. Get familiar with candlestick charts
Candlestick charts originated in Japan over 100 years before the West developed the bar and point-and-figure charts. In the 1700s, a Japanese man named Homma discovered that, while there was a link between price and the supply and demand of rice, the markets were strongly influenced by the emotions of traders.
Price action traders use candlesticks that show the emotion by visually representing the size of price moves with different colors.
Traders use the candlesticks to make trading decisions based on regularly occurring patterns that help forecast the short-term direction of the price.
Some of you might say the line chart is the best way to find good trades. But if you switch to using candlestick charts, you will have a clear idea why you should never use the line chart.
Novice price action traders might find it hard to trade the higher time frame data, but with strong determination, they can easily overcome this problem.
3. Filter the best trades
The tools and patterns observed by someone using price action trading can be simple price bars, price bands, break-outs, trend-lines, or complex combinations involving candlesticks, volatility, channels, etc.
No two traders will interpret a certain price action in the same way, as each will have his or her own interpretation, defined rules and different behavioral understanding of it.
On the other hand, a technical analysis scenario (like 15 DMA crossing over 50 DMA) will yield similar behavior and action (long position) from multiple traders.
If you need practice you can begin using stock market stimulation to trade in the market for first few months and you will understand how to manage the best trades during extreme conditions.
4. Develop a balanced system
A full-time day trader should always trade the market with the price action trading system.
Unless you know the proper way to analyze candlesticks you will never be able to develop a perfect system.
Some traders may use a chart pattern trading strategy to catch big market movements. But what about your entry and exit point?
This is where you need to use candlesticks. You don’t have anything to lose by learning about price action trading but a lot to gain.
And mastering price action trading strategy is extremely simple for beginners.
So stop wasting your time on indicators and try to learn the proper way of trading the key support and resistance levels so you can start making profitable trades in the short-term for income.
As always think smart and trade with a solid rationale in order to reap the benefits in the stock market.