Back in March last year we saw oil prices hit an absolute rock bottom – “no way on earth are they going to get any lower!” remarked my dad. Nonsensically, I checked twitter, calibrating the level of hype in my mind, dollar signs began floating around my head so to speak; sure, I knew a little about stocks before this – buy low, sell high.
It was simple, quick and could provide me with the money I needed to make my way so desperately to Australia post-COVID-19…sike, it never amassed but seeing those oil price drops below $30 gave me an immediate burst of life. Countless adverts followed me across the ether, wherever I was going, be it YouTube or even Spotify, trading adverts hounded me down for the next few days; the algorithm could sense my desperation.
Oil continued to drop until it really did hit that trail blazing $25 a barrel for a moment – first things first, I knew nothing, nada, niente about the oil price; all I know is that it was dirt cheap.
Without hesitation, I downloaded trading 212 from the app store and I was flying… seriously, I mean it, I made £400 in a day, astronomical for someone 1 month out of university. The glory days soon dried up and I was left with a minus bank balance and a deflated sense that maybe I had overinflated my ego.
Days felt like months and boy, did the months begin to rack up, looking back I wasted a lot of time and money which could have been easily avoided. Trading is a game, personally, a difficult one to master but you can play it well if you educate yourself properly.
To save you the sleepless nights and gut-wrenching losses, here are 10 things I wish I had known before trading.
Set aside an amount you feel comfortable with trading and stick to it.
This is rule number one for a reason, do whatever you need to do, take out a new debit card, create a sub account for trading funds. Keep your main finances disconnected from this amount at all costs, it is incredibly easy to add an extra £10 into your account – that £10 soon will become £1000. Humans are not infallible, stay brash but be restrained, this will save you a lot of money when sh*t hits the fan.
Decide how you are going to trade.
Is this a light hobby? Career change? Or an after-work side hustle? Be crystal clear on your level of attention, trading sporadically at different levels of focus can be deadly – if you work 9 – 5 maybe long-term investing is for you or say you are a student, trade outside of your lecture and study hours. You are either all in at a certain time or you are not in at all.
Patience is the key.
Do not jump right in just because you have heard about unhinged growth prospects; Tesla (TSLA: NASDAQ) was a buy, still is and will be for the foreseeable future but before the August stock split – it eventually hit $1000 a share. You would not be alone in assuming a gradual rise, yet, buying at $800 is not the same as buying for $400, can you hold your nerve watching a price plummet from $800 a share to $500 in a matter of days? That is for you to judge, I certainly was not – If you are not patient about your entry price, the risk was too large. This game is as psychological as it is economic.
Do not trade what you do not understand.
When you find yourself at 3AM in the morning investing in Australian housing stocks you should really start questioning your own trading strategy. If you do not know the market, its volatility, the key companies, and the history of it, do not touch it. No technical or shallow fundamental analysis will prepare you for the tsunami that could be around the corner.
Do not trade under intense emotions, whether on a high and especially at a low.
The market can produce some undeniably joyous moments for people – in my case that was the Walmart (NYSE: WMT) earnings Q2 2020, probably the biggest gain of my trading stint. Equally watching a short on Luckin’ Coffee (LKNCY: OTCMKTS) go horribly wrong was one of my biggest hits and it knocks you for six. The days that followed saw numerous miserable attempts to shore up my losses, only to find myself further in the trenches. The market does not embellish you with those emotions, only you are responsible in that regard.
Never get too emotionally attached to a stock.
I am probably more guilty of this than anybody else that graces the markets, but it is extremely important to give your portfolio a reality check. Is that stock that keeps on giving holding at unsustainable prices? Or are you just riding the wave of the most recent bull run. As much as I loved ING bank (INGA: AMS) in retrospect, every other bank was moving similar and I was standing in the firing line, blissfully unaware of the eventual correction heading my way.
Do not be greedy for the sake of it.
An extremely basic but crucial lesson – there will never be a perfect moment in trading; buying or selling later than you expected to make a little bit more money is often a hot potato, especially if the gain is unexpected. Create some ground rules for yourself and plan your exit price in advance; without knowledge of buy limits or stop losses you will never follow through on this, once again must I remind you, humans are not infallible.
Have a plan B when the ship turns south.
A trading plan with multiple options can be a lifeboat for your titanic odyssey. Even the best laid plans do not work out so making sure you still have the compass is essential; often traders can become the messiah when returns are healthy, and the portfolio is growing consistently. Make sure you know your stop losses and understand the macro and micro implications affecting the market before trading yourself into debt.
Leverage, leverage, leverage!
I left this one till the end because I believe it is the biggest cause of failure for buccaneering novice traders when dabbling n CFD’s or options. Leverage is essentially borrowing at a financial debt to increase your returns – in some cases leverage can be 30 times the ask price but the stock will be sold to you at a fraction of the price. This can be highly misleading for those wondering how they bought 30 shares for the price of 1 – I am not the most technically gifted person in the world but this is a double-edged sword and can end your trading venture before it really takes flight. Put simply a $10 stock bought at a 50 : 1 leverage means you are exposed at $500 dollars each way. Use it responsibly and you will reap the rewards or get greedy and feel the wrath.
Enjoy the experience!
Risk is relative to your financial situation and you should only trade with amounts that you are comfortable with losing. If that is $50 then start with that, if that is $100,000, be my guest! When trading becomes stressful you make bad decisions; remember to recalibrate your mind and body until you feel ready to re-enter the market or similarly, leave it. I spent countless nights frightened that my finances would be in tatters if ‘A did not set off B’ in the morning’ and I will tell you now, I did my research on technical and fundamental side of trading but the case in point is that I could not handle that amount of capital being out of my control.
Trading is not a get out of jail free card, if you do not have the funds to start, I suggest saving beforehand or practising on one of the many free demo accounts offered by brokers. Live and direct, I will say that trading is 90% psychological, if you begin to miss out on quality time with your friends and family then you are doing it wrong.
Have a plan, stay disciplined but enjoy the ride because this game is a marathon and not a sprint – I believe that applies whether you are a long-term investor or a short-term day trader.
Harry Allen 