When you start trading or investing, it almost seems impossible. Literally thousands of technical indicators, tons of different assets to buy, millions of people giving advice on what you should or should not do. Where should you even start..? You can always change and update your trading skills along the way. But when you just start trading or investing it’s best to stick to one kind of strategy. This way you get a taste of what trading and investing really is about. Reading about trading and investing is easy. But pouring in your own hard earned cash and clicking that buy or sell button is something completely different.
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There are many trading strategies you can choose from. There are literally ten thousands of strategies. No strategy is good or bad. That all depends on your goal. The best strategy is the strategy that works for you. Not everyone is meant to be a trader. If you start trading for the wrong reasons, you will probably only lose money. Just like investing is not about getting rich quick. You need to determine if you want a passive or active approach.
Before you get to the point of knowing what you are doing, you need months or even years of practise. Most people think trading or investing in stocks or crypto is easy. And sometimes it does actually look very easy. This is the case when we are in a bull market (when prices go up). If you start investing in a bull market it’s almost impossible to lose money. Because everything is going up. The shift will happen when the bull market comes to an end and a bear market hits (when prices go down). Then most people will lose money.
In the end, most people will lose money in the stock or crypto market in the long term. So, for most people, the passive approach is the best fitting strategy. The passive approach is mostly based on buying an ETF (Exchange Traded Fund, collection of certain stocks) and or obligations and just sticking with it. This sounds very boring and actually is very boring. This also does not give you the best rewards. As Benjamin Graham once said:
“There are two ways to be an intelligent investor: by continually researching, selecting, and monitoring a dynamic mix of stocks, bonds, or mutual funds; or by creating a permanent portfolio that runs on autopilot and requires no further effort (but generates very little excitement).”
If you insist on selecting your own stocks and are willing to spend forty hours a week researching then you should try to have at least between ten and thirty stocks in different industries. Does it really take forty hours a week to research some stocks? Yes, because you need to know all the fundamentals of the companies you invest in. And you need to know all the fundamentals of all companies in the same industry. Besides that, you have to know the industry as a whole as well. You should not invest in technology companies if you don’t understand their products.
If you decide this is something you want then our trading tool may help you. With our trading tool you get an in-depth look at how to read income statements and determine if the company is financially healthy. We will show you where you need to look and what metrics are important indicators. But always remember, these are just tools to help you create your own investing skills. There is no "holy grail" strategy. Because markets and companies change all the time.
You don’t have to do this when buying an ETF (the passive approach) because there are already many stocks within an ETF. So basically if one company performs badly, another company performs above average. In the end you will always get average results with an ETF. But you don’t have to spend any time researching anything. It just runs on autopilot. And for most people, this is the best approach.
What is leverage?
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Although it's beyond the scope of this particular guide, there are even more aggressive approaches. These involve using leverage. Many financial products can be used with leverage:
With leverage, you are borrowing money to get into larger positions. For example, if you have $1000 in your trading account and put this money in one position using 100 x leverage you are now trading with $100.000. You should already be alarmed by the words “borrowing money”. If you are in a leveraged position and the trade goes bad without a stop loss you have to pay back the borrowed money or your account will be liquidated. Some trading platforms (like Bitmex) are defending their customers by only liquidating up to the total capital of the customer. Meaning you can never lose more money than what's in your account. On other platforms you might have to pay back the full amount of the borrowed money. If you used 100x leverage, you can imagine this can cost you a lot of money. You should only use leverage if you know in detail how leverage works. Also, you also need to know in detail how stop losses work. Because you should always use stop losses when using leverage.
Although there is nothing wrong with using leverage, it’s extremely dangerous for beginners. Although stock markets are regulated, don’t be fooled that there is anyone that will help you with trading or investing. There is no broker that will tell you how to exactly use leverage. They don’t care. Most brokers make huge profits from traders who are wrongly using leverage. There is no reason for brokers to educate beginning traders. Just like many brokers try to lure you in with advertisements like:
"Trade with 0% commission!"
But you have to read the small letters to find out they have a huge spread which might even cost you more money...
What is spread?
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Just be aware, the only one who cares about your money is you. Exactly the reason why I made this guide for you. To save you from making mistakes that might cost you a lot of money.
But if you know the details, leverage is actually a great tool to use. Sadly, most traders that are using leverage have no clue what they are doing. Don’t take this advice lightly. There are traders that killed themselves because they put themself in unfixable financial situations (millions of dollars in debt). Being extremely aggressive with trading or investing eventually comes with a price. Only when you exactly know what you are doing, you can use leverage to your advantage. I will cover this topic in depth in our day trading guide. You can find the link in the last chapter of this guide.
If you look at it from a different perspective, when you are in complete control of your finances you can try fiddling with leverage without any issues. Just make sure you only use very small amounts of money (and leverage) and only use money you don’t need right now or in the future. And make sure if you are in a losing trade you have enough money to pay back the full amount you owe. For example, if you put $10 in a trade while using 100x leverage you should have at least $1000 in your savings account and make sure you know where to set stop losses. And make sure you are using platforms (like Bitmex) that will only liquidate your account when the trade goes bad. The Bitmex liquidations fund currently holds a staggering amount of 37.000 bitcoins from trades that went the wrong way. Be warned when using leverage.
You can also be aggressive when it comes to buying stocks. Aggressive stocks are more volatile and can give greater rewards. Basically meaning you get an above average return while also involving above average risk. Overall, aggressive stocks are from companies that are paying low or zero dividends.
What are dividends?
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Because they reinvest their earnings to grow the business. Tesla is a good example of an aggressive stock. The stock price is mostly based on future expectations rather than fundamentals of the company. That does not mean you shouldn't buy Tesla stocks. Also, you can have some aggressive stocks in your account even if you are more conservative. Just make sure the balance of stocks is right for your situation.
While there are thousands of strategies, almost every day trading strategy involves using leverage and funded accounts. If you want to make thousands of dollars each month, you also need very big positions to make that happen. Day trading is a very aggressive approach but if you can master it, it is actually a very safe approach. Because you will always trade with a plan that has been backtested and you can rule out emotions on every trade you make. That does not mean it's easy. Also, ruling out emotions entirely is pretty much impossible (unless you use scripts). If you get scared when prices jump up and down then think twice before you start day trading.
Action to take:
Determine what approach suits you the most. Do you want to dive into income statements from companies or do you want to look at charts and use various indicators? Or maybe you don't have much time to spend and want to take a more conservative approach (passive approach). Keep in mind that 95% of day traders lose money in the long term and investors in the stock market aren't doing much better.
Join the conversation.