New traders tend to start with stocks they hear about so stocks like BHP (AU), Yahoo (US), Amazon (US), Vodafone (UK), News (AU) to name a few are often chosen first yet these are the last product a new trader should be considering. Without thinking about where they want their trading to go (my point 1 above), new traders gets confused and so they start on something like the CFDs over indices which provide a very wild ride and a very short one if you are over-leveraged as well.
Just like a learner driver getting ready to drive a car for the first time, start slow and steady, progress from the driveway or farm yard, to an open air shopping centre car park, the back streets then finally a typical road and work your way up to peak hour on a major arterial road. Traders often gravitate to something popular and just start.
Start small and easy, avoiding the volatile products
The aim initially is to learn what you are doing, preserve your capital and develop a successful method that suits your style, skills, time and temperament. You may want to choose a handful of more stable stocks and learn to trade those, or develop a short list of fundamentally strong shares and look for well timed entries and exits or develop a mechanical system. Either way you may want to avoid:
- Underlying products with low liquidity (e.g. filter out anything lower than $300,000 average turnover per day on Australian market).
- Underlying products listed on 2 exchanges (e.g. BHP and RIO).
- Underlying products that trade 24 hours unless you have strict stop loss management and/or are an insomniac (e.g. products like Forex, gold, commodities).
- Indices and sectors which can be good to trade but are for more advanced traders looking for liquidity. As most of these trade on extended hours, this can be harder to manage at first as well.
- Products with variable spreads. Largely these will be sectors, some metals and low volatility shares but just as you finally see the market is turning, the more experienced traders are already out and you can find yourself floundering trying to get out at a reasonable price which usually ends up in indecision and bigger losses. This is like learning to drive on a fast moving bridge in peak hour. You may survive but don‟t put yourself through the stress or risk to start with.
There are many tools like ProfitSource, Metastock, Bull Charts, Bourse Scan and Wealth-Lab that allow you to set very detailed scanning criteria to filter the stocks you want. There is a basic but free tool at www.incrediblecharts.com.au which will help scan the daily turnover and some basic indicators but you should be considering investing in the best software tools you can afford and need. It is an investment in your business.
The big markets and big profits will come; just get yourself going first with some time in the market. Like a learner driver, all the reading in the world won‟t help unless you have some time on the road (and the more time the better) but do it cautiously as you learn.