Safety Guidelines for Beginner-Level Traders

As a trader of any level, you have a wide range of low and high-risk strategies to implement using your portfolio. The variety of options is a common reason for impulsive behavior and false expectations amongst beginner-level traders. If you can rank yourself as one of them, it’s important to reflect on the safety factor and adopt the essential safety principles before going on. 

Consider a Reliable Broker

For instance, you can be a newcomer to the market of Forex, CFDs, or Futures because these realms seem to be comprehensible to you and fulfill your risk appetite. In this case, you should look for brokers who provide MT4 trading on their platform as it’s currently the most reliable technical analysis solution in the field. Alternatives like eToro, Active Trader Pro, cTrader, and some other names are also in demand, but as a beginner, you should trust the leader or dig into each platform to understand which one will work out the best. 

While it’s only a single example, you should do the research to find the most reliable platforms for your niche. Bloggers and topical websites advertise numerous questionable offers, so you should always analyze the policies and search for reviews from experts who have a solid reputation in your niche. 

A credible broker is the one that is concerned with your long-term trading prospects. Obviously, no one completes any of your work but helping you with education (manuals, seminars, online-tutorials, relevant news, analytics, etc.) is the duty of a broker that wants to establish a strong relationship with users.

A long-term partnership with a customer is also impossible until the broker meets all the regulations of its home region. For instance, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) control the largest part of the industry in the US, while the British Financial Conduct Authority (FCA) and the Cyprus Securities and Exchange Commission (CySEC) are amongst top EU regulators. 

These organizations license eligible brokers and regularly audit them in a random order to provide traders with safety guarantees. 

Say No to “Hot Tips”

Beginner traders are an easy profit for devious marketers who are aware of their impulsiveness. The web is overflowing with advertising campaigns of self-appointed gurus who sell outdated education or pretend to gain wealth on some kind of overpromoted penny stocks. They often reveal impressive dynamics to persuade you. The trick is that such statistics can be actual but sponsored by an avalanche of unwitting investors who don’t realize that they are trapped in a sheep pen. 

The exodus of such ventures is often the same. They blow up, letting the hosts capture the entire bank without any legal issues. Such a scheme is called “pump-and-dump,” and it will hardly ever stop working. The truth is and will be the same: it’s impossible to climb high fast, and everyone who offers something like this is a friendly scammer or a dishonest advertiser. 

Get in Good With The IRS

The Internal Revenue Service (or another taxation service in your country) can be your good friend and partner if you keep your records clear and report everything according to your trader status. The rules and tax rates vary for different types of traders, so it’s highly important to understand where you are at. A smart tax strategy will open you options to cut your annual expenditures and even cut income taxes by implementing tax-loss harvesting. 

Knowing the IRS rules is an essential part of successful trading. You shouldn’t start trading until you learn at least the basic terms, such as:

• Cost basis – the initial security payment plus commissions. It’s a baseline for the calculation of profits and losses. Your position brings profit if you close a position above the cost basis and loss if an opposite occurs. 
• Capital gains – this term means a profit that you receive from selling a security for more than you purchased it. If you buy a security for less than you sell it short, it’s also considered a taxable capital gain. By holding a position for over a year, you can turn it into a long-term capital gain and reduce the tax rate to 15% or even 5%, depending on the size of your income. 
• Capital losses – you can incur a loss if you sell a security for less than you initially paid or if you purchase it for more than you earned when you sold it short. Capital losses can often be deducted. If your losses are higher than your gains, an additional $3,000 deduction can be available. If your losses exceed the extra $3,000 write-off, there’s an option to carry the losses to the next year and use another extra $3,000 deduction. 

While it’s only a short overview, you still have to dig into tax rules for your specific portfolio and manage to squeeze as much as possible out of it. 

Don’t Overinvest

Obtaining a hefty capital at the start is definitely a reason to be proud, but it’s worth nothing if you don’t distribute the credits logically. Experienced investors rarely focus on one or two instruments to balance out their portfolios. 

The most common and secure scenario amongst professionals is a diversified long-term portfolio and a concurrent strategy for riskier stakes. You will also rarely find a trader who risks with over 15% of their total capital. It can be more or less at times, but there is no sense in betting more than you can cover in case of a negative set of circumstances. You should always keep your trading balance big enough to remain afloat when the storm comes. You should strictly avoid requesting leverages and loans that you cannot reimburse and use the “zero policy” of your broker to close deals going into debt. 

This rule works for initial capitals of all sizes, and there is no formula that works better for both beginners and wolves. It’s especially effective when it comes to the riskiest trading operations, in which your results depend not only on your knowledge but on the speed of reaction as well. 

Start with little money. Many brokers allow you to create a trader with $100 or even less if you want to purchase a share that’s below than margin. Some brokers even allow fractional ownership. If you choose to trade CFDs, you are not required to have any assets at all and scalp profits from both positive and negative movements of underlying assets. 

Don’t Start Without a Strategy

This point is not to teach you trading strategies but to highlight their necessity for your capital safety. No matter how smart and experienced you feel, you cannot open a real position without a complete strategy. It must be a step-by-step plan that covers your route from start to finish. Otherwise, the loss is too probable. As a beginner, learn about at least these main trading strategies:

• End-of-day trading:
• Swing trading;
• Day trading;
• Trend trading;
• Scalping.

Don’t stick with just one strategy and practice each of them until you master them all. 

Practice

The only way to check if you are able to earn more than you lose is to trade 5 days a week. This way you will gradually minimize the risks after taking all the precautions and setting up an account with a trusted broker. Fortunately, all modern platforms let you run a demo account with virtual credits on it. 

Some traders claim this isn’t the right way to practice as you cannot experience the real emotions with a demo. On the other hand, it depends only on the way you treat this opportunity. Demo accounts are totally the same as the real ones and let you practice your first strategies risk-free. Testing your raw strategies without risks is a way to hone them and start real trading with your guns blazing. 

Is Trading for You?

The last but not least question that you have to answer is “Do I know the true difference between trading and investing?” The first one involves more frequent buy and sells cycles. They usually last weeks, days, hours, or even minutes. Does this description match your personality or is it too stressful? There’s always an option to choose to invest as your main financial initiative or even combine both types. Still, as a beginner, you have to start with just one to avoid unjustified risks. 

Stay Savvy

The only thing that can turn a green trader into a shark professional is the ability to keep updating the knowledge base day by day. Trading is a complex business regardless of the asset types you control, and it requires you to stay on top of the news and technical progress 24/7. Luck is only 1% of your career, and it works only if you are savvy. Finally, remember not to let yourself become disinherited if you face initial losses. Smooth entering is possible, but it’s not right to wait for it. Only patience and diligence will drive you to real profits. 

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February 14, 2021