When it comes to trading stocks and commodities, there’s always plenty of ‘good advice’ out there and whether it works for you is entirely subjective. However, in a landscape where there’s a far greater chance of failure than success, there are also lots of lessons about trading that you may be doomed to learn the hard way if you don’t discover them sooner.
Financial Times data suggests that 70% of retail traders lose money, and it’s inevitable that at some point in your trading experience, you will find yourself in a losing position.
However, it’s how you respond to your losses and convert your biggest challenges into wins that can help to set yourself up for future success.
With this in mind, let’s take a look at five vital lessons that nobody told you about when it comes to trading stocks and commodities and how they can help you shape your strategy:
1. Know your limit orders
Knowing what orders you can use to enter and exit trades can be important for shaping your early trading strategies. It’s possible to use market orders or limit orders to establish trades, with market orders executed at the best price available at the time with no attached guarantee.
Market orders are great for executing a trade if you’re not concerned about your order being filled at a specific price.
Limit orders, however, guarantee the price but not the execution of trades. These can help you trade more accurately at the prices you set. In this case, you can simply set up your order and wait for markets to reach the right price. If a change in direction occurs and your order doesn’t reach the execution price, you’ll maintain your position and the order won’t be fulfilled.
If you intend to learn how to trade stocks, CFDs, and commodities with a small budget, switching to limit orders can be a great way of retaining control over the markets and executing a trading strategy that prevents heavy losses and suits your goals.
2. Don’t settle on your strategy too early
There are many different trading strategies to complement traders and their styles. You may read about a strategy that brought strong returns for a trader, but it may not match your comfort levels or risk appetite.
Finding a strategy that complements your approach can take time, and it’s worth looking into the many different ways to build a trading style. For instance, inexperienced traders can confuse day trading with daily trading, however, the frequent buying and selling of stocks can lead to steady losses due to the associated fees for market makers.
Try to avoid settling on a trading strategy only after trying a series of different approaches to see what matches your style first.
3. Understand you’ll never predict price movements
Today’s geopolitical climate is a great example of how unpredictable stocks and commodities can be.
Last year, we saw Apple’s stock price fall amid reports that the Chinese government banned the use of the iPhone among its workers due to privacy concerns surrounding the US firm at a time of heightened political uncertainty.
This caused Apple’s price to become more volatile over a prolonged period and is a key example of how unexpected geopolitical events can have a major impact on markets.
Other economic factors like the performance of domestic currency can heavily influence commodities like gold trading while crop performance and adverse weather events can impact soft commodities like grain.
Being a successful trader means accepting that you’ll never predict price movements accurately, but merely make trades based on the wealth of information available to you.
Learning that your control is limited is a key step in understanding the level of risk that you’re exposed to.
4. Stocks are ‘cheap’ for a reason
Some new traders turn to penny stocks for their attractive prices, but it’s important to know that stocks are cheap for a reason.
In the case of penny stocks, there are dangers of illiquidity and scammers that can make trading your way to profits extremely difficult.
In a broader sense, stocks that appear low-cost can end up becoming value traps. Markets have a reputation for staying hot on the pulse, and typically stocks and commodities available to trade at unusually low prices imply that the markets know something that you might not.
As a rule of thumb, treat low-cost stocks with vigilance by conducting significant research and trusting only reputable sources of information to form your own opinion on its long-term prospects. While bargains certainly can be found on Wall Street, the chances are that its price is a fair reflection of the risk and potential it holds at the time.
5. Avoid your emotions
Most trading mistakes are shaped by the emotions of traders. Although it may seem easy to stay objective, when you’re on a losing streak and are struggling to secure any meaningful profits, it can be extremely difficult to avoid tilting to chase your next win.
Emotionally-driven trading can be disastrous for traders, where hot-hand fallacies and desperation can seep into otherwise sound strategies and throw any kind of trading coherence out the window.
Staying in control is important. With this in mind, try to avoid falling into the trap of trading popular stocks that you know little about, and take some time to work out your level of risk tolerance based on how you respond to losses when they come.
If you find yourself chasing losses or making complacent decisions after successful trades, try to set up a strategy that lowers your exposure to risky positions. Keeping calm on rainy days and sunny days should be your focus at all times.
Never stop learning
One of the best investments you can make as a trader is in yourself. By taking the time to learn about your strategies, risk appetite, trading tools available, and understanding fundamental analysis, you can equip yourself with everything you need to become a successful trader.
Accept that you can’t track everything and chart your own tendencies to stay in tune with your risk appetite and limitations, and you’ll be better prepared to develop a strategy that suits your style.
The world’s best traders never stop learning, and the world’s worst ones never begin. By taking your first steps on your journey, you’re giving yourself the best possible chance to become a great trader.
Stay patient and do keep investing in yourself to become a better trader.
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