If you’re looking to make 2022 the year that you start trading the markets, it’s crucial that you don’t dive straight in unprepared.
According to Sameer Samana at Wells Fargo: “While the new year typically begins with optimism and money coming into the market helps give stock prices a nice bump, 2022 begins with a bit of a hangover thanks to the pandemic and inflation.” In other words, the conditions traders face are more volatile than usual right now.
This only serves to drive home the fact that trading should not be viewed as a simple get-rich-quick solution. It takes a good deal of time and work to be successful. By following these do’s and don’ts, you can take the educational steps needed to go from an ambitious newbie to a more confident investor.
Table of Contents
1. Practice, practice, practice
People often get into trading for the wrong reasons. There’s a great deal of false information out there, including an industrial-scale supply of so-called “experts” offering dubious trading pointers on how to make stacks of money, and fast. In reality, there are very few people that successfully skip past the learning curves most encounter when starting trading.
So don’t jump headfirst into trading. Try out your analysis skills by reading around financial news websites and resources like Nerdwallet, with a view to gaining confidence in making predictions as a newbie investor. You can also try out virtual tools such as Trade Nation’s stock market simulator, which lets you see how real-time financial markets work, and allows you to experiment with risk management tools (we’ll explain more about this later on) — all for free.
2. Choose the right markets
If you’re just getting started, or you’ve tried your hand at some cheap penny stocks and want to whet your appetite a little more, some popular markets are foreign exchange (AKA FX, or forex), commodities (such as metals and crude oil) and global stock indices (e.g. S&P 500 and FTSE 100).
Your market of choice should be guided by what your own personal interests are, but also take into account your financial situation and how you respond to risk. Some markets require more attention than others due to their volatility. And if you’re looking for a gentle introduction to the markets, avoid day trading — this can easily take up several hours of the day.
Some traders focus on companies with a competitive advantage, which is often a result of a unique selling point (USP). Having a USP is a good way of preventing their competitors from stealing a company’s market share. Facebook, for example, has a competitive advantage in its network effect: nearly 3 billion people use it worldwide, which means that it is part of daily life for nearly half the world’s population.
Initial Public Offerings (IPOs) often carry a great deal of volatility in the first few months of their entry into the market, so these are considered high risk. Buying into rapidly growing companies might seem like a surefire way to see profitable returns. But this can also lead investors astray, as it has done for investors in companies like Oscar Health or Robinhood in 2021.
3. Develop a strategy
Once you have picked a target market, you need to develop a trading strategy. Think long and hard about what you want to get out of trading, and also think carefully about what trading style suits you best. Are you someone who would thrive in the cut-and-thrust of the day trading environment? Have you got the time to trade this way? Or would you prefer to take a longer view over market movements, trading in the direction of the long-term trend?
If you are looking for short-term gains, then forex trading may be your thing. If so,, you will want to learn how to analyse currency pairs and get to grips with indicators like moving averages and the Relative Strength Index (RSI).
Every plan is different, but there are also a few core principles that successful investors stick by, as part of their overall financial strategy. While learning about your chosen markets, it is also vital to become familiar with certain trading principles, like keeping your primal emotions of fear and greed in check. A failure to do so can be the ruin of ambitious traders.
4. Manage your risk
High inflation is now a major concern for investors and consumers alike, and it looks as if it could be with us for months or years to come. During this period, income-oriented stocks tend to go down as individuals and businesses have less purchasing power for their money. You can, however, take concrete steps to limit potential losses when trading in a volatile market during inflationary periods.
Stop-loss orders are vital tools in a trader’s armoury when it comes to managing risk. A stop-loss order can be used to close out an existing position if the underlying market moves against you. It will be triggered automatically if the market hits a predetermined level chosen by you. This will close out your position and limit any losses if prices continue to move against you. Say, for instance, you have an order to close out your long position (where you hope the price will go up) on a certain stock if the price falls 10% below where you bought it. If the stock subsequently falls 20%, then in most situations your position would be closed automatically after a 10% fall, thus reducing your losses.
Diversification is also a good risk management strategy. This means spreading your investments across different companies in unrelated sectors. For example, in times of high inflation, seeking out investments in economies worldwide that are not undergoing steep price rises can balance out any loss in real earnings that inflation causes.