First, understand that online trading is not the same as making a purchase from a local retailer through set prices. Investments are always placed in real time where bidding is then carried out by the sellers and buyers. If you want to trade online, there are some basic rules you must abide by to achieve your goals.
Make a Plan and Follow It
There are rules that stipulate the exit, management of money, and the entry of the trader. Today, online traders are not limited on what to choose for trading. They can choose currencies, futures, commodities, exchange trade funds and bonds. Before risking online trading and losing money that could have been invested elsewhere, research widely and test your idea first to determine if it is indeed viable. If you feel it is will be successful, always stick to the predetermined plan not to risk destroying its success. Although making and following a trading plan may seem daunting, consistency is what pays up. Following the trading plan means not deviating from what has already been set in the rules and in this case, rules were not made to be broken.
Treat it Like a Business
Online trading is highly unpredictable and trading does not come with a monthly pay check and so, it can at times be discouraging when you don’t see instant results. This is why you must approach it as a business. Every business will at some point incur taxes, risks, losses and expenses and doesn’t always make money at the beginning. These are the elements you must look out for in online trading. Your trading will only be truly successful if you follow the plan. If you intend to trade for a long time, you must cultivate enough time for intensive research and ensure your overall plans address your long-term commitment.
Don’t Commit all your Money at Once
Most new investors in online trading think that it will work out the way they have planned or according to what someone has told them. Understand that your choice could fail, only trade with what you are able to lose so you are sure it will not impede your ability to meet other financial obligations in case what you try to trade is lost. It would impact on you heavily if you risked investing capital you shouldn’t have. For instance, do not fund your account with your mortgage finances. It is vital to keep in mind that trading with non-expendable money can get you into a lot of pressure to succeed. This is the kind of pressure that has been known to lead to major losses and poor decisions.
What is an Exit Strategy?
As you make your entry plan, have your exit strategy prepared. Also known as ‘Take Profit,’ it is the predetermined rule of closing profitable positions. Determine how you will get out of your losses and wins. Understand that the exit is what matters, not the entry. This is the point that determines if you leave the trade as a winner or as a loser. For you to be successful, you must choose your strategy carefully. There are three basic strategies, including:
- Trailing stop– this is placed anywhere away from the market price of stocks. Where there is a short position, it is set above the market price. In a long position, it is set slightly below the market price. This strategy keeps a trade open and profitable as long as the right direction is followed. However, when there is a large margin in the price changes, the trade closes.
- Fixed Exit– in this strategy, traders get a fixed profit percentage. In such a strategy, the trader does not have to lose or sell when the trades fall.
- Dynamic Based Exit– this strategy protects profits. Here, reversal indicator signals are used as exit signals. The exit strategy chosen must match with the trading strategy.
There are two reasons you should stop trading including:
- When your trading plan appears ineffective
- If you as the trader are ineffective
If you are losing more than expected in your online trading, it is time to quit. Sometimes, the plan set for trading may not always work as anticipated. Find it necessary to quit and re-evaluate your strategy. It does not have to signal the end of your trading experience but should be a chance for you to solve the problems in your plan first before resuming. When a trader is ineffective, elements such as bad health and external factors such as stress may have contributed. Even with a good plan, your trading experience can fail if you do not execute it properly.
Although there is much to ponder on in online trading, following the principles mentioned above can quickly get you off to a great start.