SIMON BROWN: Get your trading hustle going
Buying and selling in the stock market is fun, hairy and lucrative, but ruinous too sometimes. Here’s what to consider
It’s still a new year, and many readers will be looking for new challenges or side hustles; some will consider trading. To start with, a quick definition of trading is to take a short-term position in the stock market that is usually measured in days or weeks but can run for months or even years. Still, it's shorter than a long-term buy-and-hold strategy.
Trading can be a strong source of income — certainly as a side hustle, and potentially even enough to live off. But lots of words of caution are necessary here, the first large warning being that you’re going to have to learn the skills, and that this will not happen overnight. What’s more, it will not make you richer than Warren Buffett any time soon.
Your first port of call will be to find a broker; do not head off into the dark corners of the internet to do so. You’ll find plenty of low-cost, perfectly good local brokers that offer trading, and if you’re already an investor in some type of financial product, say a unit trust, it’s likely that your current financial outfit has such an offering.
Second, you need to start learning. This is going to take time — lots of it — and initially, while you’re learning, don’t try trading with hard-earned real money. Use a demo account and “paper trade” because the reality is that at first you’ll most likely suck.
While getting smart, resist the temptation to pay for courses or software. The internet has everything you need to get your trading skills up to speed, and it also has plenty of quality free software. Also check with your broker what courses and software it offers, which will probably be for free.
My next point is what and how to trade. Foreign exchange (FX) trading attracts everybody, but it is an almost certain path to being poorer, not richer. Leave FX to the professionals.
Exchange traded funds ... may be boring and simple, but you’re learning here, and the deep end is no place to start
My advice is to start trading index exchange traded funds. They may be boring and simple, but you’re learning here, and the deep end is no place to start.
One of the key lures of trading is leverage. This is where you may have only R10,000 but the leverage, via a derivative such as a contract for difference or futures contract, enables exposure of anything from R35,000 to R250,000. It sounds great: imagine profits on R250,000 instead of on R10,000. However, you also have to imagine the potential losses that leverage can deliver. If there is even a 4% move against you in a leveraged position, your R10,000 is gone.
The short answer is that leverage hurts and is, again, best left for the pros. Start without any leverage and in time you can scale into it, but I know many successful traders who never use leverage at all.
A further important point is position size and stop loss: how much you risk in each trade and when to admit you’re wrong and exit. Here the maths is easy, but you’ll run into the psychology of trading, which is the real crux of the matter. Fear and greed are killers. Read books by Mark Douglas to get to grips with the emotional side of trading.
Lastly, have fun, keep it slow and in time you’ll reap the benefits.
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