How to get started as a trader

Dakalo Mungomeni @ Gledsmuir AT Mooikloof Equestrian Estate.

I’m regularly asked by people who have never traded before, how they can get started in the world of trading. Whilst the barriers to entry are not particularly high, the world of trading in the financial markets can be quite intimidating to those who have never been exposed to this industry before. It can be a dangerous place to play if you don’t know what you’re doing, but can also be tremendously rewarding if you can master the intricacies of the market. So here is a step by step guide to follow if you’re wanting to get your feet wet in the world of trading:

Read all you can before you put your money on the line

Before you put your hard earned money into a trading account, start out be reading a few books on the subject of trading. One of the best books to start with is Trading For Dummies 2nd Edition by Michael Griffis and Lita Epstein. Despite the condescending title of the book, it actually contains a great deal of information on the starting points of trading and will teach you some of the lingo and jargon that is used in the trading world. The book is 384 pages long, and can be bought online for around R250.00 – R300.00. This will be money very well spent and the cost of this book is only a fraction of what it may cost you if you start trading without proper knowledge.
 
Attend seminars and webinars
 
There are numerous seminars and webinars available to novice traders. The JSE runs a variety of evening seminars for those who are interested in investing and trading in stocks. A number of brokers also offer beginner seminars and webinars for those getting started. One of the brokers that have made great strides in terms on beginner education in South Africa is Standard Bank Online Share. Justonelap is also a fantastic source of information and provides regular webinars for start out traders and investors.

Decide what you want to trade
 
There are many products available to trade. From currencies, to stocks, commodities, indices and bonds, there are thousands of potential products that have a price that moves, and all of these are potentially tradable. And then there are derivatives of each of those products too. You will need to decide which instruments you are interested in trading. For the retail market, stocks and stock indices as well as currencies (and derivatives thereof) are generally popular to trade, because the amount of capital required to trade those products is affordable. The key is to ensure that you don’t try to become a Jack of all trades, and a master of none. Focus on one instrument when you get started and learn how its price moves and how the mechanics of that product work. Once you have an understanding of that product, then perhaps you can venture further out to try different products to trade. In terms of the South African market, physical shares or share CFDs would be my advice in terms of which products to start off with. You will then need to pick a small group of shares that you wish to focus on. (note: CFDs are much cheaper to trade than physical shares, and hence this would be my first choice of product to trade. But it is important that you understand how CFDs work before you get started. Traders Corner offers an Understanding CFDs Course. It is a 2-hour evening course and it costs R490 per person. More information on the next Understanding CFDs Course can be found (here)

Start out by paper trading / dummy trading
 
My first steps into the world of trading were taken with my dad, when he encouraged me to “mock trade” with fictitious money. Each evening, he would bring the newspaper home and we selected a few shares that we decided to follow. I then hand drew charts of those share prices and we mock traded with R100 000 of fictitious money. Those were in the days before internet trading was available to the general public. These days, many brokers have developed dummy accounts that allow you to practise trading online before you apply your real money to your trading account. This is a great way to get started, and to get to understand how the market works, as well as what commissions and fees you will need to pay on each trade. Spend a while trading in the safety of a dummy account before you put your precious capital on the line. Also remember that dummy trading is not the same as trading for real, because the emotions of trading with real money are very different to trading with play-play money. But nonetheless, this is a good place to get started. IG Markets offers a two week demo on their trading platform with R100 000 of play-play capital to allow you to feel your way around the market and the platform.

Capital required
 
Once you have done some reading, attended some seminars and spent some time trading in a virtual environment, it’s time to try trading for real, with real money. But the question I am often asked is how much is a decent amount of capital to start with. This will vary depending on each individual’s financial position, but in general I think that around R50 000 is a good amount to get started with. The reason I say this is because all brokers offer a minimum trading commission on each trade and this amount is fixed, irrespective of your account size. Hence, the smaller your account, the larger will be the proportional amount of the fixed trading cost per trade. The base fee is generally around R100 per trade, and then brokerage is added on a sliding scale if the total cost comes to more than the minimum of R100. You also need to take into account that there will be some losses along the way. It is inevitable that some trades will go wrong. You need to ensure that the amount of capital you have in your account is sufficient that you can weather a few bad trades. Start out small and learn the intricacies of trading properly before committing too much capital to one trade. Ideally, the trading capital that you start with should be money that you can afford to lose without it affecting your lifestyle.
 
Software
 
Most brokers offer an online platform to trade with. Some of these platforms are really excellent and have improved substantially over recent years. They incorporate a lot of information as well as interactive charting functions that allow you to do some of your own analysis of share price charts. As a start out trader, the software provided by your broker will probably be sufficient. As you develop your trading skill, you may wish to invest in additional software such as a purpose built technical analysis package to help you do more detailed analysis. But when you’re starting out, the free platforms provided by the brokers should suffice.
 
Be realistic about your expectations
 
Be aware that trading is not easy. There are many unscrupulous providers out there who advertise trading as an easy road to riches. Unfortunately for too many people, it is often an easy road to the poor house because they don’t invest the time and effort that is required to become successful traders. In the book “Outliers” by Malcolm Gladwell he refers to the fact that it takes on average 10 000 hours of investment into yourself to become proficient at any profession. This includes trading. I can vouch for this. I’ve been through many ups and down in my trading career and have had several times where I have lost a lot of money along the way. The statistics are that around 95% of people who attempt trading for themselves will lose money and give up. Hence the odds of being successful are not high. But if you’re willing to invest the time and effort that it takes to become proficient as a trader, you can be a part of the 5% who are consistently successful. Be realistic about your expectations, and also be aware that if you are just starting out, you have a long road ahead of you and will pay many “school fees” along the road to that 10 000 hour mark. But if you are persistent, you can become one of those few people who gets to truly enjoy the freedom and satisfaction that comes with being a successful trader.