When I started trading two years ago, as the world went into lockdown, it seemed as-is markets only went up. Back then, it was easy to make mistakes because the market corrected itself within a matter of days. However, it’s a very different market now that central banks are fighting inflation and tightening monetary policy.
Trading can be exciting, and even addictive, for some. Watching prices flash green, and numbers go up, can make your heart race. But, it can also be a risky proposition. If you’re unlucky, you could lose everything just as quickly. This is why I’d like to share a few lessons I have learned the hard way.
The advice I’ll provide applies across all markets, whether you’re trading Forex, crypto-currencies, or stocks. We’ll also take a look at MetaTrader 5, one of the most popular trading platforms used by traders around the world. And finally, we’ll talk about high leverage brokers and why you should use leverage with caution, especially if you are just starting out.
It’s often said that a trader is his own worst enemy. That’s because your emotions – fear and greed – can get in the way of trading, even for the most seasoned investors.
When the markets are going up, it’s easy to get caught up in the hype and start buying too aggressively. This is known as FOMO, or Fear Of Missing Out. Similarly, when the markets are going down, it’s easy to panic sell, and close out all your positions in an attempt to cut your losses. But neither of these reactions is helpful – in fact, it could be counterproductive.
The best investors buy at a low, when others are panicking, and sell at a high when others are rushing to buy. The key to success is to stay calm and rational at all times. When the markets are going up, take a step back and think about whether the prices are really justified. And when the markets are going down, remember that nothing goes up in a straight line and that downtrends are to be expected. If you wait long enough, the market is likely to retrace back.
However, this is easier said than done. If you are struggling with your emotions, try to keep a diary when you write down your trading decisions, including the reason you bought as well as a target selling price. Look back to it when you are tempted to sell, and consider whether your “bull case” still applies.
Alternatively, you could also look into algorithmic trading robots to make buy and sell decisions on your behalf. These robots are called Expert Advisors on the MetaTrader platform. And finally, you could also look into opening a copy trading account, whereby your account copies another trader’s buy and sell orders.
Trading is a marathon, not a sprint. This means, setting realistic short-term profit targets, and focussing on capital preservation.
If you started trading in the early days of the pandemic, you might have unrealistic return expectations. And it’s easy to see why when meme stocks and crypto-tokens go “to the moon” overnight. However, these aren’t ordinary market conditions, as stocks generate in the region of 10% per year, over the long run according to studies.
Importantly, preserving your hard-earned gains is just as important as generating a healthy return on your investments. For example, you could set a “stop-loss” order a bit below your buying price to automatically close out your position should the market move against you. This will force you to realize the loss, but may be preferable to sitting on large unrealized losses for many months or even years.
This brings us to the choice of a trading platform. When comparing brokers and their trading platforms, look for one that allows you to set stop loss orders, and ideally more complex order types. Over time, as you build experience, you’ll learn how to combine order types to take your profits, and cut your losses, in an almost automated manner.
It’s also advisable to open an account with a broker that allows you to trade a wide range of asset classes, unless you are only interested in Forex, stocks or crypto for example. The wider the range of markets you can trade, the more opportunities you will have to diversify your portfolio across asset classes.
The MetaTrader 5 (MT5) platform is popular with retail traders because it allows you to access a large number of markets, trade directly from charts, and set complex order types. It also supports trading robots, known as Expert Advisors, that can help you take emotion out of trading. However, it’s advisable to compare some of the best MT5 brokers first, as not all brokers provide the same level of service.
4. Brokers With High Leverage Can Be Risky
Leverage is another word for borrowing, and it’s often a selling point for brokers. A ratio of 100:1 means that you can trade $100 for every $1 that you have in your account. However, this money isn’t printed out of thin air. The $99 difference is money loaned to you by your broker and is money you’ll have to pay interest on.
Working with a high-leverage broker is a double-edged sword that will boost your potential profits and losses. If you opened a $100 position in a stock, a mere 1% fall in the stock’s price would, in effect, wipe out your $1 equity. Your broker would then make a “margin call” to compel you to deposit more money.
That’s why it’s best to avoid leverage altogether if you are new to trading, or perhaps only start with very low levels until you fully understand how it works. And if you ever use leverage, try to have money on the side, available for the inevitable margin calls.
5. Diversify Your Investments
We’ve only touched on this briefly before, but try to diversify your investments across securities and asset classes. This means that you shouldn’t put all of your eggs in one basket. For example, if you only invest in stocks, you’d stand to lose more than if you invested across different asset classes, such as bonds, real estate, and commodities.
Be mindful of hidden correlations. For example, crypto-currencies tend to be highly correlated with tech stocks. In other words, they tend to move in the same direction, and often even more so than the Nasdaq. That’s why investing in Cathie Wood’s ARK Innovation ETF won’t act as a hedge if you also invest in crypto.
Importantly, these correlations can change over time and even go to 1 during times of market stress. Before the pandemic, crypto used to be uncorrelated against other asset classes, because trading was niche and the preserve of crypto enthusiasts. However, this has changed in the last 2 years, as crypto-currencies have become mainstream and attracted institutional money.
When learning to trade, a lot can go wrong. It’s easy to let your emotions get in the way, take too large a position, leverage up, and burn your account in a single trade. That’s why it’s important to start nimble, with capital preservation top of mind.
The journey to becoming a successful trader doesn’t happen overnight. It takes time to learn the ropes and develop both the technical and emotional skills that are key to success. Be patient, stay focused, and don’t give up!