The vast majority of retail investors on the stock market are buy-and-hold investors. They analyze the fundamentals of companies and exchange-traded funds (ETFs) and purchase assets they believe will grow over time.
However, there are also market participants who want to beat the market. These people seek to turn market volatility into profit rather than simply accepting the ebbs and flows of the market in a long-term plan.
Online trading is a fast-paced process that takes a bit of skill. But if you get it right, it can become a highly lucrative activity. The best traders can exchange their full-time jobs for a life of financial freedom, so it’s no surprise if you want to get started.
How to Trade Stocks (for Beginners)
Trading stocks is an intricate process that comes with a bit of a learning curve for beginners. The process is akin to predicting the future, but with a twist. Stock traders use a variety of tools that assist in analyzing market trends and improving the probability of successful predictions, much like a psychic uses a crystal ball.
If you want to start trading, it’s important to learn about the market in general, the basics of trading, and the tools you need to succeed. With enough research, practice, and dedication, you can become the next successful trader.
1. Learn the Basics of Stock Trading
The first step to success is to learn the basics of stock trading. In particular, it’s important to understand the different types of trading and the order types you’ll use when you make trades.
Common Trading Styles
Every trading strategy you use will follow along the lines of one or more of the four core trading styles:
- Day Trading. Day trading is the process of using patterns in stock charts to determine short-term price movement. Day traders never hold an open trade longer than a day, hence the name. However, this short-term trading style is also very risky. So risky, in fact, that if you’re flagged as a pattern day trader, you must maintain a minimum balance of $25,000 in your trading account at all times.
- Swing Trading. Swing traders also use patterns in charts to find entries and exits. The difference is in the time frame. Swing traders look for swings in stock values and generally hold positions for anywhere from a few days to a few months. Longer hold times alleviate some risk of losses, but there is always risk in trading.
- Momentum Trading. Momentum traders pay close attention to how quickly a stock is moving up or down. They want the fastest moving, most popular stocks because these are the ones most likely to continue their trends. Momentum traders may hold their positions for a few days to a few months. The idea is to stay invested until the momentum slows and a reversal is imminent.
- Position Trading. Position trading is the longest-term style of trading. Position traders attempt to get in at the bottom of trends and sell at the top. They may hold positions for anywhere from a few months to a few years.
Common Order Types
As a beginner, you might think that buying a stock is as simple as placing an order, paying the cost of the stock, and getting the shares — and it can be. That’s the case with a normal market order (an order to immediately buy or sell stock), but there are multiple order types that give you more control over the price you pay to buy, the price you accept to sell, and the conditions under which you buy and sell stocks.
- Limit Orders. Limit orders turn into a market order when a specific price limit is met or exceeded. For example, say a stock is trading at $10.05 per share, but you don’t want to pay more than $10 per share. Simply place a limit order with a $10 limit. The order will be executed only if the stock falls to $10 or below.
- Stop-Loss Orders. Stop-loss orders limit your losses. For example, say you buy in at $10, but you don’t want to risk losing more than 5%. By placing a 5% stop-loss, if the stock falls 5% to $9.50, the order to sell is executed automatically, limiting your losses on the trade to $0.50 per share.
- Trailing Stop-Loss Orders. Trailing stop-loss orders are used to limit losses while increasing profits. Like a normal stop-loss, if you set a 5% trailing stop-loss order on a stock worth $10 per share, the position will sell if the stock falls to $9.50. But with a trailing stop-loss, if the stock goes up, the stop-loss value will follow. For example, if the stock climbs to $11, the new threshold for a 5% trailing stop-loss increases to $10.45, locking in a $0.45 per share profit even if the stock drops 5% from its high.
The order types above are the basic types you’ll need to start trading, but they’re not the only ones available. There are several advanced order types you should take the time to learn about as you go.
2. Learn the Basics of Stock Analysis
If you trade without analyzing your opportunities, you’re essentially gambling. You know what they say: the house always wins.
Never blindly throw money in the market hoping for the best; it’s a sure-fire way to lose your shirt.
What sets trading apart from gambling is the ability to use tools and analysis as you place your bets.
Long-term buy-and-hold investors use fundamental analysis to determine which stocks are likely to grow over the long run. Traders also consider fundamental analysis from time to time, but they focus their attention primarily on technical analysis.
Technical analysts look for patterns in stock prices using a wide range of technical indicators to determine the best time to buy and sell stocks. Get comfortable with using a few of these indicators to give yourself a fighting chance before you start trading.
3. Open a Brokerage Account
You can’t trade without a trading account, and all brokerage services are individual businesses, so they’re unique. It’s important to pick the best broker for your circumstances.
For example, if you’re a beginner trader, you should look for a broker that provides the educational resources and tools you need to succeed. Once you become an expert trader, you’ll want to work with a broker that offers an advanced trading platform.
Consider the following no matter what level of trader you are or your style of trading:
- Fees. Most online stock brokers offer free trading on domestic stocks and ETFs, but some charge fees. Make sure to choose a low-cost broker that doesn’t charge commissions on domestic trades. Using a commission-free brokerage is especially important for traders who plan to place a higher volume of traders.
- Available Order Types. The more order types you have available to you, the more control you have as you trade. Look into the different types of orders you can place as you compare your brokerage options.
- Fractional Shares. Some stocks are so expensive that it may be difficult to allocate enough money to trading them. There are several brokers that offer fractional shares of individual stocks so you can buy whatever dollar amount of whatever stock you’d like, regardless of that stock’s price tag per share.
- Trading Platform. If you’re a beginner, you don’t need the most advanced trading platform, but you do need one that has basic technical indicators and charting functionality. Look into the trading platforms offered by the brokers you’re considering and choose one that meets your needs.
- Educational Tools. Training and education is especially important for beginners. A strong educational foundation sets the stage for a profitable trading experience. Look for a brokerage that offers training courses or education materials; many offer these for free.
Some of the best brokers that cater to beginners and expert traders include TD Ameritrade, Interactive Brokers, and Fidelity, but there are countless options out there. If you complete your comparison and you’re stuck between two great options, look for new account promotions. For example, some brokers like Robinhood and WeBull offer free stocks to new traders.
4. Create a Trading Budget
It’s easy to get caught up in the moment while you trade and forget everything else going on. Although it’s important to focus, trading can draw emotions out of you that may lead to big financial mistakes.
For example, if you take a loss, it may be tempting to double down to try to recover. Without a trading budget, that could mean you end up losing money you can’t afford to lose. It’s best to keep emotions out of the trading process altogether, but sometimes that’s hard to do in the moment. Create a budget to ensure you never bet the mortgage payment.
Your trading budget should include:
- Per-Trade Budget. A general rule of thumb is that you should never risk more than 5% of your portfolio value on a single trade. Use your personal risk tolerance as the basis for your limit. Riskier traders may risk more per trade, while risk-averse traders are only comfortable with smaller trades.
- Per-Day Budget. Set a maximum daily drawdown you’re comfortable with. This sets a limit so if you’re in the middle of a losing streak, you walk away before the losses become too much to handle or start driving you to make emotional (bad) trading decisions.
- Overall Budget. This is the amount of money you intend to trade with. If you’re building up to an overall goal, consider adding regular, comfortable contributions into your overall budget until you hit your goal.
5. Choose a Trading Strategy
Investors never invest without an investment strategy, and traders should never trade without a strategy either. Your trading strategy helps to keep emotions out of the process by telling you:
- What Type of Assets to Trade. These are the types of opportunities you’re looking for based on asset class and how the asset is acting in the market.
- Entries & Exits. Your strategy should include specific parameters for entering into a new trade or exiting an open one; these parameters are known as buy and sell signals.
- Risk Management. Your strategy should also outline how you will manage risk with each trade. In most cases, risk management includes sticking to your maximum per-trade budget and setting a stop-loss to limit your maximum drawdown.
There are several trading strategies to choose from. It’s worth learning about them and choosing one that fits your needs.
6. Research Stocks
Research is an important part of just about anything worth doing. Most trading strategies rely on technical analysis, but some, like swing trading and position trading, also require a bit of fundamental research.
Position traders and swing traders attempt to tap into long-term trends. Swing traders look to profit on the most robust middle of the trend movement, while position traders seek to exploit the trend from bottom to top.
Technical analysis helps determine entries and exits, but it’s helpful to understand why the trend is happening and use the fundamental data to confirm the longevity of the trend.
For example, if a stock seems to be headed into a long-term upward trend and you come across news that the company just released a blockbuster product, your trend is confirmed.
Keeping up with news, analysis, and research helps you select only the best opportunities to trade.
7. Practice Trading
The old adage, “practice makes perfect,” rings true in a wide variety of situations, but not necessarily in trading. No trader is perfect because nobody can accurately predict the future 100% of the time. However, practice will make you more familiar with your trading strategy and more likely to be a successful trader.
The best trading tool for practicing before you risk your real money is a market simulator, and there are a ton of simulators to choose from. Market simulators mimic the market in real time. The only difference is that instead of using real money to practice, you use virtual money with no value. So there’s nothing to lose.
Some of the best market simulators are offered by brokers or trading education services.
Spend a few weeks in the simulator testing and refining your strategy before risking your first hard-earned dollar in the live market. Doing so gives you time to get to know and refine your trading strategy. You can also get to know your own habits as you trade. This knowledge will be valuable when you trade in the real world.
8. Place an Order
You’ve picked a broker, a strategy, tested trading with a simulator, and gotten to know how your strategy works and your own trading habits. Now you’re ready to hit the ground running.
Use your strategy to find your first asset and get your trade on. Don’t be shy; if you’ve followed the steps above, you’ve prepared for a while for this moment. You’re ready to dive in head first.
9. Create a Trading Journal
As you trade, your experience will naturally make you a better trader. But you can flatten the learning curve from beginner to expert substantially by using a trading journal.
Simply log all your trades in a journal, including your entries, exits, risk management tactics, and notes. Then read over your journal once weekly to find out what types of trades produce the biggest profits and the biggest losses. You may also find simple mistakes you’re making that you can fix to expand your profitability.
To take a step further, consider using an interactive trading journal like TradeBench to help you visualize your trading history and improve your trading performance more efficiently.
10. Analyze & Revise as Needed
As you read through your trading journal, analyze the opportunities you find to improve your trading process and act on them. Make subtle changes to your strategy, using a trading simulator to test each change before deploying it in the real world.
No trader ever reaches perfection. It’s best to take the time to assess and improve your trading process regularly, regardless of your level of expertise.
Trading stocks is an appealing process because those who do it well often live financially free, make their own schedules, and enjoy more free time. However, like any career, you start on the bottom rung of the ladder.
It takes quite a bit of time and dedication to learn how to trade effectively and become one of these experts.
Nonetheless, if you’ve got the patience, research ability, and willingness to dedicate yourself to becoming a successful trader, there’s no reason not to try your hand as a trader. Who knows? In a year or two, you may find yourself trading for a living.