Making Money Trading Stocks

Stock Trading Basics Guide

To begin trading, you'll need to open a brokerage account. It's reassuring to know that up to $250,000 of your money in a brokerage account is FDIC insured. This means that if the brokerage firm fails, the Federal Deposit Insurance Corporation (FDIC) protects your cash deposits up to that amount. This protection doesn't apply to the stocks themselves but ensures that your cash is safe, adding an extra layer of security to your trading activities.

Once your account is set up, you can deposit money and start buying or trading shares of various companies. It may feel like a gamble at first, but with research, patience, and an understanding of the markets, you will develop a better sense of when to buy or exit. I remember my first trade was with the ticker TQQQ, a triple-leveraged ETF of the NASDAQ. From that trade, I made a whopping $32.17 xD. That moment changed my view on how money is utilized. It made me realize the potential to make decent money from the market. Even banks use our money to buy/trade stocks or lend it out to make significant profits, while paying us barely a dollar a month in interest. From that point on, I knew I had to invest my money myself, rather than letting the bank do it for me.

The basic idea is to buy shares at a low price and sell them at a higher price. Even small gains, like $0.50 or $1 per share, can add up if you own enough shares. Say you were to buy 1000 shares of any stock and it happens to go up $0.50. You would be up $500 profit if you were to sell. Investing isn't pure gambling; it's about making informed decisions based on research and market trends.

Knowing when to enter and exit a trade is crucial. Traders often use technical analysis, which involves studying price charts and indicators to identify patterns and trends. For example, you might enter a trade when a stock breaks and retest above a resistance level or when a moving average crossover occurs. Exiting a trade can be based on reaching a target price, hitting a stop-loss level, or observing a reversal in trend.

Shorting is another strategy where you profit from a stock's price drop. You borrow shares and sell them, then buy them back at a lower price. However, if the stock price goes up instead of down, your losses can be significant because there's no cap on how high a stock price can go. This is why risk management is crucial.

To decide whether to go long (buy) or short (sell), traders analyze market conditions and sentiment. If you believe a stock or the market will rise, you go long. Conversely, if you expect a decline, you go short. This decision is often based on a combination of fundamental analysis (evaluating a company's financial health and growth prospects) and technical analysis.

Risk Management

It's important to understand that having red or losing days is normal. Not every trading day will be green, and that's because no one truly understands the stock market to an extent where they can predict every move. There are too many variables at play. Even if you have half of the 252 trading days in a year being red, you can still be profitable with proper risk management.

To protect your investments, it's essential to use risk management strategies. One effective method is using stop-loss orders. A stop-loss order automatically sells your stock if it drops to a certain price, limiting your losses and protecting your investment. For instance, you might set a stop-loss at 1-5% below your purchase price, depending on your risk tolerance. This way, you can prevent wiping out your account. Additionally, position sizing is important; never risk more than one percent of your total capital on a single trade. Key Note (Stop orders are not executed in Pre-market/After-hours).

Striving for a 1:2 (1:3, 1:4, 1:5, etc.) risk-to-reward ratio is a key part of this strategy. This means that for every dollar you risk, you aim to make two dollars. Let's break it down with some math:

• Suppose you risk $100 on each trade.

• With a 1:2 risk-to-reward ratio, your target profit is $200 for each winning trade.

• If you make 100 trades, and 50 of them are losing trades (red days), you lose $100 on each of those 50 trades, totaling $5,000 in losses.

• For the 50 winning trades, you make $200 on each, totaling $10,000 in profits.

Even with half of your trades being losers, you still end up with a net profit of $5,000 ($10,000 in profits - $5,000 in losses). This demonstrates how proper risk management and a favorable risk-to-reward ratio can lead to profitability despite having many red days.

By following these steps and incorporating risk management strategies, you can trade more confidently and repeat simple trades that can make you money.