How to start Trading - The Beginners Guide

Before diving into active stock trading or embarking on long-term investments, there are numerous essential factors that beginners should be acquainted with. This comprehensive guide is tailored specifically for those who are new to the stock market and possess limited knowledge about its functioning. It covers fundamental questions such as how the market operates, the essential tools required, how to prepare adequately, what prerequisites should be met before trading, and the various types of trading strategies available. This post encompasses all the foundational information necessary for initiating a trading journey.

The following is a systematic breakdown of the crucial insights you need to grasp:

Grasp the Fundamentals 

The market is an intricate amalgamation of opportunities and risks that attracts a diverse range of individuals on a daily basis. While some individuals succeed in navigating its complexities, others find themselves at a disadvantage. Notably, those who face setbacks usually share a common trait: an absence of foundational knowledge about the market.

Understanding the Zero-Sum Nature 

The market operates on the principle of a zero-sum game, where gains for one participant equate to losses for another. This intrinsic nature highlights that for every profitable trade, an opposing trade has incurred losses. Individuals who encounter losses often fail to investigate the underlying reasons for price fluctuations. This is especially relevant for beginners, as professionals typically possess a stronger grasp of these basics.

Overcoming Misguided Approaches 

As novices, many of you might recall instances where you pursued supposedly "hot" tips and buy/sell recommendations touted by self-proclaimed experts. Reflecting on such experiences, you might recognize that these endeavors often yielded unfavorable outcomes. Therefore, adopting a more prudent approach involves immersing oneself in the rudiments of the market.

Define Your Trading Objective 

What drives your desire to trade? Are you aiming to grow your capital? Are you seeking a form of investment? Is trading a crucial income source? Begin by clarifying your underlying purpose.

This sense of purpose will serve as your motivational force, anchoring you in the market and empowering you to acquire skills with confidence. If pinpointing your purpose proves challenging, consider seeking guidance from experienced traders. Emulating and learning from them can effectively cultivate a clear sense of purpose. 

Remember, ventures devoid of purpose tend to encounter frequent failures, and traders lacking a clear purpose are more susceptible to downturns.

Develop Your Unique Trading Strategy 

A prevalent misconception suggests that mastering the stock market can be achieved through a mere two-day crash course. Similarly, relying solely on business news channels and newspapers is believed to be a pathway to financial prosperity.

It's imperative to recognize that such notions could lead you astray. Whether you're unfamiliar with the basics or overconfident in your grasp of them, don't be misled. Basics are the cornerstone; now, it's time to construct a tailored strategy that resonates with you. 

In this regard, we offer a selection of pre-established strategies that you can adopt with slight adjustments or implement directly after validating them through back-testing.

Select a Suitable Broker 

A broker serves as the intermediary that facilitates the purchase of shares from sellers and the sale of shares to buyers. It's vital to comprehend that a buyer is necessitated for every seller and vice versa. When assessing potential brokers, consider the following criteria:

Cost-effectiveness: Opt for a broker with low brokerage fees to maximize your profits.

Reliability: Evaluate the broker's technical and fundamental reliability, as glitches during trading can be detrimental. Steer clear of brokers with a track record of technical issues like those encountered with Karvy.

Honesty: Your chosen broker should uphold honesty and integrity, ensuring the safety of the funds held in your account.

Research Tools: Look for brokers offering research scanners to enhance your analytical capabilities.

Speed and Execution: Especially relevant for day trading, a broker should offer fast and efficient trade execution.

While numerous brokers are available, I personally recommend the services of two brokers that stand out for their reliability and technical proficiency: Angel One and BFSL. These brokers provide a robust and cost-effective platform, making them excellent choices for traders looking to navigate the market efficiently.

Engage in Simulated Trading or Virtual Trading

Prior to allocating real funds to your trading account – which is naturally required for buying and selling shares – I recommend that you participate in ample paper trading or demo trading to develop essential skills. Numerous demo trading platforms are accessible online, offering you the opportunity to engage in simulated trading for a duration of at least six months.

Commence with a Modest Approach

Once you've completed your demo trading phase and feel prepared for actual trading, it's prudent to start on a small scale. Begin with purchasing and selling just 1 or 2 quantities of stocks. As you gain confidence in your trading system, gradually increase your trading quantities. 

Embarking with modest investments aids in cultivating self-assurance, enabling you to progress to full-fledged trading while safeguarding your capital effectively.

Familiarize Yourself with Trading Terminology 

To navigate the trading landscape, acquaint yourself with essential terminology that you'll encounter:

NSE and BSE: These Indian stock exchanges facilitate various types of trading and exclusively list tradable stocks.

Leverage Rate: This represents the multiplier your broker applies to your deposit, granting you increased buying power.

Automated Trading: Also known as algo-trading, it's a computer program executing trades based on specific criteria. It's governed by input and rules to produce corresponding output/actions.

Initial Public Offering (IPO): It denotes the first shares offered by a private company upon becoming publicly listed.

Penny Stocks: Stocks trading at a significantly low price, often around Rs. 10 or below.

Understanding Key Terms

Entry Points: The price at which you enter a trade.

Exit Points: The price at which you exit or close a trade.

Bull/Bullish: Bullish traders anticipate price increases.

Bear/Bearish: Bearish traders anticipate price declines.

Market Trends: The directional movement of the market.

Square Off: Closing a trading position.

Beta: Measures a stock's correlation to overall market movement.

Bid: The price a trader offers to pay per share for a stock.

Index: A reference marker for traders (e.g., Nifty50, Bank Nifty, Sensex).

Margin: Borrowed money from a broker for investment.

Volatility: Risk of return fluctuation in a stock or index.

Nifty: Top 50 companies index in India.

Bank Nifty: Index of 12 public sector banks.

Sensex: Benchmark index of BSE.

India VIX: Measures Nifty50 volatility.

Technical Analysis and Indicators

Technical Analysis: Studying stock behavior through historical price analysis.

Indicators: Tools indicating buy/sell signals on charts.

Support: Level where a stock bounces back from.

Resistance: Level where a stock struggles to break through.

Moving Averages: Average prices over a specific period.

Relative Strength Index (RSI): Indicator of buy/sell strength.

Moving Average Convergence Divergence (MACD): Measures moving average differences.

Bollinger Bands: Gauge price relative to past trades.

Stochastics: Compares current price to past price range.

Candlesticks: Price chart displaying high, low, open, and close values.

Types of Trading

Day Trading: Position closure within the same day.

Swing Trading: Holding shares for days to weeks.

Long-Term Trading: Involves years or decades.

Psychological Aspect 

Mastering emotions is key; swift decision-making is vital for entries and exits. Rationality is essential to avoid trading errors. Control greed and fear for effective trading.

In Conclusion Forge a strong foundation by understanding the financial market. Cultivate a habit of daily chart analysis and price action comprehension. Prioritize learning to establish your unique trading strategy, and validate these strategies through back-testing to gain confidence.