18 Mar When to make your first trade?
5 minute read
Your first trade is a momentous occasion. This is the first step in what will be the beginning of a whole new future. Many beginner traders flounder over when they should make that first trade, missing great opportunities (sometimes avoiding really bad scenarios), and other times waiting so long that they never actually get to the point of placing a trade at all.
Waiting for the “right market conditions” or the “perfect trade” is a common response I hear from beginners. But as a beginner, you don’t know what the right condition or perfect time is. At the beginning stages of this new exciting journey, you are at the least qualified point to actually be making decisions!
So, through this article, I want to discuss what it is you are looking to achieve with your first trades and how to take that step. Success does not happen overnight, and you will not create wealth (or achieve whatever your ultimate goals are) with one trade.
This is a journey that requires dedication, practice, learning, and the right mindset. The markets are “the hardest way to make an easy dollar”. But you don’t need to have a PHD in economics to be successful. Some simple guidance can help you get into the markets easily and without risking the farm!
Get your mindset right!
Excitement. Optimism. Uncertainty. Nervousness. Greed & Fear. These are just some of the emotional reactions every new trader goes through when they are about to make their very first trade.
But when do you make your first trade? At what point do you decide to pull the trigger, and what should you expect?
Most beginners will practice or paper trade as it is called, before they decide to use ‘real money’ or go live. Paper trading is a great opportunity to see how things work, understand the concepts or strategies, and to iron out any misunderstandings before you have real money on the table.
Unfortunately, many beginners view this practice or paper trading period as a means to prove that they can make money in the markets. With this type of mindset, one of two things will occur:
- The beginner proves their methodology right making money in practice. Too often, however, when the beginner goes live and makes their first losses on trades (early in their live trading, or later), they don’t understand why the losses have started to occur, and this can lead to bad trading habits and continued losses.
- The beginner fails to prove their strategy works, and they keep practicing. In many cases, never actually going live as they are looking for the perfect trading strategy.
There is no perfect trading strategy!
Every methodology, strategy, concept, or analytical technique works. It’s whether or not the market conditions suite that strategy approach and how you manage your trading and portfolio management that will result in profitability in the markets.
Your goals during paper trading are to:
- Understand the notions of the markets; terminology, how prices move, how orders are executed, your strategy (and its pros and cons), analytical methods, and portfolio management.
- Condition your mindset and develop routine. Money = emotions. Fear and Greed are the two biggest drivers of your decision-making process. But Fear and Greed will cause you to fail in the markets. You want to make unemotional decisions, regularly and consistently.
- Develop your strategy and plan. Having confidence in your strategy is critical. It will save you from second guessing when the markets are not suitable for the approach you are adopting (no strategy is infallible). The metrics you want to measure your strategy by include:
- Win/Loss ratio. Do you have profitable trades more often than losses
- Average win versus average loss. If your average gain is lower than your average loss, then you can still be losing overall if your win/loss ratio is positive. This is where the saying “Keep your losses small, and let your profits grow” comes from
- What was the cause of your loss positions?
Did you miss something in your initial analysis?
Was there a broader market/economic change or something specific that occurred to that stock/industry?
Did you mis-manage the trade (not follow your plan for entry, management or exit)?
Was it simply just a loss position and you were wrong with your view? - Did you manage your profitable trades according to plan? Could you have managed it better?
- Learn to walk before you can run. Your journey with the markets doesn’t start with you competing at the Olympics in the 100m sprint. That is, you’re not going to make millions on your first trade. So learn to walk first. Trade small with capital that won’t break the bank. Your paper trading should reflect this too, and as your account grows in live trading, you will then need to adapt accordingly.
Accept losses and try not to be perfect. There is not a trader alive who has not lost money at some point. Beginner or experienced. Anyone who states differently is bluntly a liar. You must accept the fact that you will lose in the markets. How you manage those losses and what you learn from that experience will determine whether or not you survive and thrive.
Rip that band aid off and just make that trade!
There is no time like the present!
While I encourage beginners to paper trade, that is to iron out the kinks and feel comfortable in what they are doing, it is my opinion that you should simply just rip the band aid off and make your first trade as early as possible.
The objective of your first trade (or should I say series of trades) is to learn. Therefore, your first trade doesn’t need to be over complicated.
Something simple, small and with the objective of getting into the markets. Of course, you are not planning on making a loss trade, so you need to adopt your strategy and position management according to a thought-out approach with clear objectives, methods of analysis and management criteria. There’s no point throwing dust into the wind and hoping it will form a solid brick.
No matter what your strategy approach, what timeframe you plan to hold that position, or what your objectives are (for gains or managing losses), here are a few tips on making that first trade:
- Focus on companies you know. You will have a better understanding of what these companies do.
- Keep your analysis/decision making simple. Don’t try to over complicate your approach to start with. You can always build on your strategy as you learn and gain experience.
- Keep notes on your decision-making process, and what actions you take. And why! We call this a Diary, and it is invaluable in developing your skills and knowledge.
Above all else, put the time in to study, evaluate and learn. The markets are constantly changing, and even the most experienced investors/traders are continually adapting.