Trading might seem difficult and not everyone perceives themselves as being “qualified” enough to be a trader or have sufficient knowledge to begin trading. Here, we break down the whats and hows of trading so you can gain a headstart in your journey today!
Day trading is the act of buying and selling a financial instrument within the same day or even multiple times over the course of a day. Taking advantage of small price movements can be lucrative — if done correctly. However, for inexperienced individuals who might not have a well-thought-out strategy, the flipside is also true.
Here are six steps to simplify trading into a journey you can embark on:
Step 1: Setting aside funds
Before carrying out any trade, it is important to decide on the amount. Trading within your means will require you to acknowledge your comfort and risk levels. Going beyond them will only ignite unnecessary emotions we could do without.
A rule of thumb for budgeting that you may rely on is Elizabeth Warren’s 50/30/20 rule. This rule advocates segmenting your budget into three categories: needs, wants, and financial goals. With 20% of your income for financial goals which include trading, you now have a starting point.
Step 2: Choosing the right market
This step is often overlooked. Unlike investing, trading requires constant monitoring of the market and execution of (buy and sell) trades. Hence, you will need to consider the trading hours of the exchange you would like to trade in.
For example, trading hours of United States’ exchanges is 9.30pm to 4am (Singapore) which means that you will need to stay up to monitor the market — not something many of us can afford especially with a day job.
See also: Fuelled by China’s promise: Golden opportunity for Hong Kong SDR investing
Secondly, most people are aware of the stock market but there are other markets that can be used to carry out day trading as well, such as the futures, forex and options market.
Step 3: Knowledge is power
Many do not recognise the potential of knowledge in this industry. On top of basic trading processes, traders will need to keep up with the latest news and events that will affect their investments. These include the Fed’s interest rate plans, economic outlooks and even companies’ earnings reports.
Also, remember that it is easy to end up in the wrong place by getting brainwashed with hype. This is how you can often lose your way and ultimately your capital. To begin, you may make a wish list of counters you would like to trade and regularly read up on those selected companies or markets. Learn to rely on credible financial sources and not be tempted by hype.
Step 4: Trading strategies
Before making your investment, you should devise a trading strategy that suits your needs and wants. Devising a suitable trading strategy will assist in your investment decisions over the long term.
There are many trading strategies and we will share the four basic strategies below:
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Strategy 1: Value Investing
Value investors seek stocks they believe are undervalued. They look for stocks with prices they believe do not fully reflect the intrinsic value of the security. Value investing is predicated, in part, on the idea that some degree of irrationality exists in the market. This irrationality, in theory, presents opportunities to get a stock at a discounted price and make money from it.
Strategy 2: Growth Investing
Rather than look for low-cost deals, growth investors want investments that offer strong upside potential when it comes to the future earnings of stocks. It could be said that a growth investor is often looking for the “next big thing”. Growth investing, however, is not a reckless embrace of speculative investing. Rather, it involves evaluating a stock’s current health as well as its growth potential.
Strategy 3: Momentum Investing
Momentum investors ride the wave. They believe winners keep winning and losers keep losing. They look to buy stocks experiencing an uptrend. As they believe losers continue to drop, they may choose to short-sell those securities.
Strategy 4: Dollar-Cost Averaging
Dollar-cost averaging (DCA) is the practice of making regular investments in the market over time and is not mutually exclusive to the other methods described above. Rather, it is a means of executing whatever strategy you choose. With DCA, you may choose to put $300 in an investment account every month. This disciplined approach becomes particularly powerful when you use automated features that invest for you. It’s easy to commit to a plan when the process requires almost no oversight.
Step 5: Review your strategies
After you start trading with your chosen trading strategy, you will still need to continue monitoring the market and the stock performance. A periodic review can be done every six months or whenever a major event occurs.
Here are three reasons why it is important that we have a periodic review on our trading strategy:
(A) It helps you to maintain the optimal asset allocation mix
Asset allocation is essentially the proportion in which you have allocated your total funds across different investments. For example, let’s say you wish to invest $100,000. Since you are moderately risk-tolerant, you decide to invest in equity and debt funds in a 50:50 ratio. Over the course of one year, the NAV of the funds will naturally fluctuate. And at the end of the year, say your portfolio’s asset allocation between debt and equity stands at 43:57. In that case, your original asset allocation no longer holds true. The equity component in your portfolio has increased.
(B) It helps you to align your investment portfolio with changing life goals
When you are younger, you may be open to taking more investment risks in favour of the possibility of earning higher returns. Over time, however, your risk tolerance could drop, particularly as you get closer to retirement. Similarly, your life goals may also change over the years. A new goal may appear on the horizon and you may need to shuffle your investment portfolio accordingly.
(C) It allows you to take advantage of market movements
Reviewing your portfolio periodically also makes it possible for you to take advantage of market movements. For instance, if you expect the equity market to perform well in the foreseeable future, you could rebalance your portfolio to increase your equity funds’ weightage. Conversely, if you expect that the equity markets may enter a bearish phase, you could increase your investments in debt funds instead.
Step 6: Group trading
As market performance heavily relies on investors’ investment actions (buyers and sellers), we strongly believe that investment is not an individual activity. You can always discuss with your friends and family and refer to investment articles for investment ideas — there is no need to be alone in your trading journey.
At PhillipCapital, we strive to enhance your trading journey by providing educational content (Market Journal, Podcasts and Webinars) that may provide insights to your investment decisions — so that you can trade like you mean it.
For more information: you may contact [email protected]. E Lee Jian You is a dealer at Phillip Investor Centre (Raffles Place); Tan Yan Yi is a dealer at Phillip Investor Centre (NorthPoint City)
