1. A new trader is likely to experience some early pitfalls:

• The danger of commissions. You pay your broker or bank a commission every time you do a trade- and if you don’t watch out, these commissions will eat up your trading money! To minimise commission costs, make sure you do your research on various brokers and banks. Compare their services and commissions carefully to avoid paying more than necessary.
• Slippage. This means that your order could have been filled for less money than you paid. If you want to avoid this, you’ll need to make your orders the right way. There are two order types: limit orders and market orders. Using a market order is rather like saying ‘give me a stock’. This guarantees you a stock, but you don’t know at which price. If the price has increased from $50 to $53, you are paying $3 more than you intended. Using a limit order is like saying ‘give me that stock for $50’ You won’t pay more than $50, but if nobody is selling at this price, you might not get a stock. Limit orders are definitely the way to go, since they prevent you from overpaying for stock.

2. Though poor trading may resemble gambling, good trading is nothing like it. The inability to resist the urge to bet is a sure sign that you’re an inveterate gambler.If you ever have the feeling that you need to trade or that you just can’t stop, you are gambling. Another sign is when single trade begin affecting you emotionally. If the stocks move in your favour, you feel happy and powerful, but if the trade moves against you, you feel crappy. Emotional trading causes you to gamble away your money is search of positive feelings. A professional trader doesn’t get emotional, because she knows that trading is merely a way to make money. She doesn’t feel a personal connection to any given stock. Take responsibility for your actions and consequences. Good trading means taking responsibility for your own decision-making.

3. When it comes to the market, try not to follow the crowd. What does market mean? Professional traders know that it is merely a mass of people following trends. But remaining an independent think isn’t always easy, in fact, human instinct impels us to seek out the safety of the crowd. Such impulsive decision-making is quite dangerous, and can suck people into disastrous trades.

One historic example is the Tulip Mania, which took place in Holland, in 1634. The prices of tulips were increasing and everyone thought that this pattern would continue. Many people abandoned their businesses to go into the tulip business. Ultimately, however, it all collapsed, leaving people broke and destitute.

4. How do you stay way from the crowd? Start by identifying the most important types of group behaviour in the market. The market in terms of two groups: bulls and bears. Bulls bet on prices going up; bears, on prices going down. To work out whether you’re in the midst of a bull or a bear market, you’ll need to analyse-chart analysis.

5.It all comes down to the following five elements: opening prices, closing prices, the highs of a bar, the lows of a bar and the distances between the highs and lows.

The opening prices tend to show the amateurs’ opinion of the value, they are often acting in the morning before going to work. The closing prices reflect the decisions of professional traders.

If closing prices are higher than the opening price, this means that professionals are probably more bullish than amateurs, and vice versa. This is the knowledge you’ll need in order to discern whether you are in a market of bulls or bears.

The high of each bar reflects the maximum power of bulls, the low of each bar displays the maximum power of bears. The distances between the highs and lows reflect the intensity of the conflict between bulls and bears. If you want to estimate activity in the market, it’s this distance you’ll need to pay attention to. An average-sized distance represents a cool market; a distance half the average size indicates a sleepy market; and a bar double the average size marks an overheating market. Slippage is normally lower in quiet markets, so avoid getting into the market when there is a huge discrepancy between prices, a clear indicator that the market is overheating.

Slippage refers to all situations in which a market participant receives a different trade execution price than intended. Slippage occurs when the bid/ask spread changes between the time a market order is requested and the time an exchange or other market maker executes the order

6. How to grasp the mood of the market? Two more elements that a bar chart reveals. To find the first of these, we’ll need to examine the price level. When buying is so strong that it reverses or interrupts a downward price trend, we are witnessing support. You can imagine support as the floor that you bounce a basketball on. Every time the ball hits the floor, it bounces back up. You can find a support level in a chart by connecting two or more lows on the chart with a horizontal line. A support level exists because people in the market have memories. If the price of a stock was falling and stopped at a certain level and then increased, traders would remember this low level and be likely to buy when prices approach it again. When selling is so strong that it reverses or interrupts an uptrend, the market is demonstrating resistance. Imagine a ball being tossed up, hitting the ceiling and dropping down. In this example, the ceiling would be the resistance level. Using chart analysis you can find resistance levels by connecting two or more highs in a chart with a horizontal line. From 1966 to 1982, there was a major resistance level for the Dow Jones Industrial Average. Every time there was an uptrend into the area between 950 and 1050, the uptrend was interrupted and reversed. Traders called this resistance zone ‘a graveyard in the sky’ because it was so strong.

Essentially, you should begin selling when you hit the resistance level-before prices go down-and buy at the support level-when prices are at their lowest. In fact, many traders usually buy at support and sell at resistance zones, which also helps entrench these levels even further.

7. There are so many things you can trade: stocks, options, ETFs and futures etc. Stocks are great for beginners, as they’re easy to understand.

8. No matter what you choose to trade, there are always two criteria they should meet: liquidity and volatility. Liquidity is the average daily volume of traded shares. The higher the liquidity, the easier it’ll be to trade. The author of the book himself learned how important liquidity is when he got stuck with 6,000 shares of a stock of which only 9,000 shares were traded per day. To get rid of them, he had to do several trades, paying commissions and slippage. To ensure you never find yourself in this position, concentrate only on stocks that are traded at a rate above a million per day.

Volatility is average short-term movement in the price of the stock. The higher the volatility, the more opportunities there is to make money-and lose it, too! We can measure volatility with a beta, which compares the volatility of a certain stock to its benchmark, a general figure, such as market index, that reflects the health of the market. For example, if you have a beta with a value of two, that means that if the benchmark rises five percent, stock is likely to rise ten percent, and vice versa, when the benchmark falls. It’s advisable for beginners to focus on low betas, as this limits the amount you could lose when trading.

9.Proper risk management. If you want to be secure, you’ll need to follow two key rules:

• The 2% rule.This prohibits you from risking more than 2 percent of your trading equity on a single trade. For example, say you have $50,000 of trading capital in your account. The 2% rule dictates that you can only risk $1,000 (= 50,000 * 0.02) per trade. Suppose you want to buy a stock worth $50, and to limit your risk of losses, you set a so-called stop order at $48. A stop order means that when the price of the stock falls to a given amount, the stock is automatically sold. In our example, you risk $2 per share. If you are allowed to risk $1,000, you can buy a maximum of 500 shares. The 2% rule is one of the most effective ways of minimising your losses.
• The 6% rule. This rule dictates that you can’t open any new trades for the rest of the month if your total losses in the month plus the risk in open trades reaches 6% of your trading capital. Start by calculating this month’s total losses, then add your current risks in open trades.Using our earlier example, this risk is $1,000 or 2% (500 shares with a risk potential of $2 per share), Finally, add these two numbers together, if the sum equals 6% of your capital, you’d best abstain from opening new trades before the month is up.

10.Keep your trading on a track with a trade journal.

‘You can only improve what you can measure.’

Alexander Elder

The cornerstone of successful trading is record keeping, if you don’t keep an eye on how much you are gaining or losing, how can you ensure you improve your strategies in the future? Reviewing your trades in your journal one or two months after you’ve sold will help you prepare for future sales. Oftentimes, trading signals that seemed vague and confusing at first become clear when you review them a month or two down the line. Journaling can also prevent emotional trading. One of the main things you should be looking for in your journal entries is your personal equity curve. This will help you determine whether you’re making money or losing money in the long term, and whether your trading system is up to scratch. If your equity curve shows a downtrend, if it may be a call for you to pay closer attention to your systems, or your discipline, to see what needs tightening up.

‘Show me a trader with good records, and I’ll show you a good trader.’

Alexander Elder

11. Test the waters before you take the plunge! If your are interested in trading, why not open a virtual portfolio as a test? Prepare yourself by broadening your knowledge of finance, this background reading will give you a head start as you embark on your career in trading.