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.


By Mike McCudden, head of retail derivatives at Interactive Investor.