10 trading tips to keep you sane and solvent
Extreme market volatility over the past year and the agony of watching the market fall off a cliff while pension managers are out playing golf has driven more and more people into short-term trading.
Trading follows a different methodology from investing: you are looking for short-term movements and speculating on price falls as well as rises. Investing entails looking for value and taking a longer-term view. Here are 10 trading tips that have stood the test of time.
1. Knowledge is king
Have an economic calendar, and a company reporting and dividend schedule to hand. Devour the business pages and read the odd trading book. Have a financial television channel on, but avoid information overload.
2. Trade with the trends, not your friends
Do your own research and never back your mate's "great stock tip".
3. Trading is not investing
It's sensible to have a long-term view on a particular stock or index, but you should also look for trends and identify where you can enter and exit your trades to your advantage. Stick to your guns.
4. If you are trading on margin, never tie up more than 30% of your trading capital
Leverage is a wonderful tool, but don't bite off more than you can chew. Capital preservation is absolutely vital.
5. Only trade with what you can afford to lose
Don't remortgage your house to support your trading. If you are new to it, you must start by simply trading for fun, as you will no doubt learn the hard, and expensive, way.
6. Keep it simple and stick to what you know
Build a watch list of about 10 shares you're interested in and get to know their movements on a daily basis.
7. Greed is most certainly not good
Be prepared to take a modest profit, and to cut a loss and stick to your strategy. Failure to do so is a certain road to ruin.
8. Don't ignore gut feelings
Once you have a bit of experience, you can begin to trust your instincts. If a position feels a bit precarious, get out. The first cut is the cheapest.
9. Stop loss at no more than half of what you hope to make from a trade
Many traders use ratios. If you want to risk £20 to make £60 from a trade, you are using a 3:1 ratio. You can play with the ratio, but never risk more than 50% of what you aim to make.
10. Build a strategy and stick to it
Don't stray from your path, be disciplined and learn from your mistakes.
Mike McCudden is head of retail derivatives at our sister website, Interactive Investor
This article was written for our sister publication, Money Observer
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.