Fundamentals of Good Trading & Investing
Updated: Oct 29, 2020
Would you buy the first car you saw on the dealership lot? Of course not! Like every good decision you need to learn the fundamentals of trading and investing. These are simple concepts you must first learn and apply to begin your journey to becoming a successful investor and/or trader. First, what's the difference between trading and investing?
Trading: Buying into and out of positions in a market on a shorter time frame. This can be as few as hours and minutes or as long as days, weeks and months. Generally, you are looking to earn consistent short term returns to grow your portfolio for income as opposed to long terms returns for retirement and will be taxed more.
Investing: Buying into and out of positions in a market on longer term time frame. You are looking to earn returns in months, years or decades with the potential to use this money for retirement, your kids college or savings account, or other long term objectives.
It's important to first know what your objectives are when you start out. Everyone is going to be different so make sure you're doing your due diligence and don't compare yourself to others. The first mistake you can make is wanting to earn huge profits compared to veteran trader in the market. So what can you do to start making good trading and investing decisions? Glad you asked!
Simple Steps to get started in Trading & Investing:
1) Have a plan/strategy (know what time frame you're using to grow your money)
A) For longer term investing, generally, you are going to need a lot of patience and wait
for the right time to invest in the market.
B) For short term trading you want to study chart patterns in technical analysis to learn
how to trading stocks appropriately and learn when to get involved.
2) If you are trading stocks you are going to want to have a general knowledge of the
company or ETF that you are trading. Good questions to ask yourself: What sector is it
in? -> Semiconductors, Home builders, Consumer Cyclical's, EV's? What products or
service do they provide? Is it an index fund, Special Acquisition Company (SPAC), low
float short, growth company, oil or gold ETF?
Why are these questions important? Because you need a basic understanding of
how the products and stocks that you are trading impact your taxes, or if they are linked
to commodities and if they are short term trading products versus long term
investments. If you trade certain products they will impact your taxes and you may
have to fill out certain forms such as K-1s. This impacts your time and you may have to
get an accountant to handle these transactions so its important you understand how it
3) Don't over trade, be patient and wait for the setups.
4) Implement a strong risk management process.
5) Never add to a bad trade.
6) Once you have a profit in a trade, never let it become a loss.
7) Don't be a one way trader or investor, be flexible.
8) Concentrate on a few stocks - the strongest if you are long and the weakest if you are shorting, don't worry about what everyone else is doing.
9) Add to good trades only.
10) You're trading to make money. Treat it like a business, not for fun and games.
11) Don't worry about missing out on a trade. There will always be another one!
12) When carrying a position in the market, don't leave your computer without leaving a stop loss order.
13) When making an original trade or investment set a stop loss (physical or mental) - don't overstay or start hoping! This leads to bad habits.
14) Use market sentiment to your advantage.
15) Trading with too much size or not sizing your trade properly.
All of the ideas above one thing in common in trading and investing you need to have discipline. It's what sets the good and bad traders apart and will set you up for success!
Essex's Trading Quote of the Day (QotD)
"All successful investors have two things in common. They are extremely disciplined and they understand the downside of their investments even more than the upside. A big part of winning big is only losing small."