The idea of trading might simultaneously be incredibly attractive (make gains), and unbelievably scary (make losses).
If you’re one of the many people looking to take a gander at trading, we spoke with Oriano Lizza, a CMC Markets’ Sales Trader, to get some answers on a few common questions beginners might have.
How to start trading?
This might be simultaneously the easiest, and most difficult hurdle to overcome.
In fact, instead of answers like setting up a brokerage account, deciding on your lucky number, asking the strange man downstairs for help, Oriano gave the equivalent of a cold shower as his first step.
“The first stage is obviously to research the type of product you’d like to trade, then you're able to narrow your search field down or be able to identify the types of brokerages that offer the product that you're looking for.”
There are literally thousands of products you can trade, from technology shares like Apple to Netflix to commodities such as gold or coffee to different indices such as the NASDAQ 100 or the US30.
Once all your research is done, your next move is to open a demo/practice account in order to familiarise yourself with the platform. Platforms vary in their navigational complexity, so it is important that you are comfortable with the platform you choose.
By the way the timelines he gives are in the weeks and months, not minutes and hours, Oriano suggests, yes you guessed it, even further research.
Research the brokers you will be engaging. He acknowledges that many people are “price sensitive”, and that a lot of new market entrants recently are offering attractive promotions on trading.
However there is a need to choose between a global broker, a local broker, whether the broker is licensed or not, and many more.
“There are a lot of unlicensed brokerages that continue to pop up within the online space. But they don't, as a consumer or retail investor, offer the same kind of protection surrounding the deposits and client funds, so it is always important to do your due diligence.”
Don’t know how much time and effort you’re comfortable with? Demo accounts.
Yet another misconception with trading borne from years of watching vaguely trade-related Wall Street shows was what the whole process was like.
People intently staring at the screen for fear that arrows would divebomb the moment they take their eyes off the screen.
In reality, trading “can be quite flexible”, and often boils down to experience.
Experience, and some might argue patience, is not in bountiful supply for new traders though.
According to Oriano, a lot of people want to just “open the account, fund the account, and begin trading” without building the foundations.
“Placing the trade should be the easiest part of the process.”
The time taken to slowly gain the experience Oriano recommends for trading is not only to better understand the market, it’s to better understand yourself, “because ultimately this is your capital or your money that you are putting on the line”.
To get this much needed experience, Oriano recommends using the demo account if you do sign up with CMC Markets.
“We advise clients to use a demo account for anywhere between three to six months, or even longer, until they are comfortable to begin trading.”
Oriano points to this as a great way for new traders to develop their own strategy, understand their own risk profile (how much they are willing to risk), and how they respond to losses in the market.
“Because ultimately people only see the end goal, which is the potential to make money, rather than doing the steps beforehand to get to that end goal.”
Is the rise in new traders a recent phenomenon, what should I look out for?
You might have been seeing some real quirky stories regarding stock markets in the news recently.
According to Oriano, this has coincided with a different type of client making waves in the stock market, the millennial generation.
“In previous years, a lot of the clientele and demographic were the older generation, who established themselves, and had extra capital to deploy in trading.
Now we're seeing a younger demographic come through, looking for alternative, entrepreneurial, ways to make money outside of your traditional nine to five jobs.”
In a way, the FOMO appeal of stock markets might be at its highest right now.
Oriano also highlighted this behaviour:
“No one really wants to miss out on the equity market, or any other particular market, like crypto”
How many times does a new trader need to refresh their broker app?
New traders look at their phones more than someone who got just dumped. Maybe it’s the fear that they will miss a spike that guarantees their retirement, or a dip that would add a few more years to the ending point, so it just feels like new traders and refreshing their trading app is a match made in heaven.
Oriano understandably had a more nuanced take, “it really is dependent on your strategy.”
He lists out these strategies into three broad categories:
“Some people have a long-term strategy, where they buy and hold for long periods of time and are just looking to make small incremental gains.
Alternatively, there are people who trade short to medium term, swing traders, where they place one to five trades every two to three months when the opportunity arises, so there's not much of an urgency to constantly be looking at the portfolio.
Then on the extreme, there are day traders or intraday traders who are looking at market moves within a very short timeframes, and taking advantage of volatility spikes or swings within price on particular products.”
The aforementioned GameStop incident falls squarely under the third category.
These profiles are important because of what it means for your other non-trading aspects of your life.
“I would always deter people from getting so emotionally involved into trading that they're constantly looking at their portfolio because you've got your own life to get on with.”
What Oriano suggests is instead trying to find a strategy that works and fits in with your lifestyle.
“If you're somebody that has a lot of spare time. Sure, you may be able to afford day trading and constantly looking at the screen.
If you're somebody that has a full time job, and you only have time to trade for a small window during the day, then you may want to look at other swing strategies or less active and more passive strategies so you're not constantly looking at the computer screen.”
Is there a minimum amount you would suggest someone have, to get started in trading?
Ultimately, you just must have enough money to cover the margin of the trade.
But before you withdraw your bank balance, there are some pointers you might want to note.
Oriano says a rule of thumb is that whatever you put in; you should be comfortable with losing.
“So in the case that you lose all the money that you put into the account, your whole life won’t be impacted financially and you won’t have to start borrowing money, selling assets, that's not what the online brokerage or trading space is trying to encourage.”
Trade within your risk profiles and your means.
This means that when the market does turn against you, “you're not going to be set back, your life's not going to be impacted detrimentally.”
What kind of mistakes do beginner traders make?
A point Oriano consistently reiterates is the need to develop strategies and understand risk.
He puts it this way, if you aren’t developing the strategies, what is basically being done is “punting”, betting on the price going up or down, instead of actual areas where opportunities lie.
That need for a strategy often takes a backseat when the next big new thing is being plastered all over the net, with loud declarations of millionaires being made.
“So it created a false reality for a lot of these new traders because they just put money in, they placed some trades, the market continued to go up, they continued to make money, and they think trading is easy and that you don't have to have a strategy.”
Which is all good when prices are scaling historic highs, but what happens when there is a change in the direction of the market?
That in itself is something beginner traders might struggle with.
“When there's a change in the direction of the market, those particular clients, because they are new to the market, are not sure how to handle things when they start to incur losses.
Generally, what we would see is clients just either continuing to top up, or just hang on hoping that the market would revert back in their favour.”
Oriano makes it clear that a perpetual trade on prices going up is not a good tactic.
“And that's obviously not a strategy, hope is not a strategy.”
So how do you avoid these mistakes?
You guessed it, demo accounts.
“Demo accounts help you strategize, develop risk management, whilst helping you work on your patience and discipline.
It’s important that novice traders use the demo account as if it was their own capital and trading approach to provide an accurate reflection of their trading results.”
But like anything, Oriano stresses that “it's a consistency game”, and slow incremental gains are the bedrock of long-term success.
(You can sign up for a demo account on CMC Markets here)
Any other points that you think would be relevant for beginner traders to take note of?
“Try and drown out the noise from the wider market and really spend time developing and honing your own skills and understanding yourself, because often what you are doing is you're trading against your own emotions, and your own sentiment at the time.
So if you have an understanding of that, you'll have an opportunity to survive a lot longer in trading and be able to also maintain those consistent profits because the longer you're in the trading game, the more market cycles you get to see.
Something that we often see are clients trying to trade four to five different asset classes, and within those asset classes trading four to five different products.
In order to monitor such a wide range of products easily is dependent on your strategy, so it’s important that you ensure you’ve set your boundaries as to what you want to trade before entering the market.
The most profitable traders are individuals who identify their own strategy and risk management and are disciplined enough to commit to these even during periods of uncertainty or heightened volatility.
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