Learn How to Trade Stocks – Learn the Stock Market

By Dale Gillham | Last Updated 28 February 2019

Let me say right upfront, there is a vast difference between knowledge and understanding. I was once told by a wise person that investing without knowledge was gambling. At the time I tended to agree, but it wasn’t until I started learning how to trade stocks that I really understood the essence of this message. What I have learned over more than 20 years of investing is this: Gaining knowledge is one thing; it's gaining the right knowledge and understanding that is critical to your long-term success. So, my intention with this article is to share with you what you need to do to ensure you succeed when learning the stock market. 

The cold reality for those learning to trade stocks

It has been my experience that the vast majority of information available to those wanting to learn how to trade stocks is of little use to most people. This is because the vast majority choose to read books, surf the internet or attend free or weekend workshops. 

dice on a stock chart

But all they really get is a little bit of knowledge and very little understanding. Let’s face it, would you really trust your money and financial future to a person who has attended a weekend workshop, read a few books or surfed the internet? Unlikely, but this is the journey most individuals take and then they wonder why most traders fail when trading the stock market.

The cold reality is that trading is one of the few things you can do where you know from the outset you will lose money. The issue I find is that while many agree with this statement on an intellectual level, the majority never believe it will happen to them. They say ignorance is bliss, but in trading ignorance can be very expensive, and in many cases more expensive than getting a good education.

It is also common for those new to trading to want to trade highly leveraged markets, which is very risky, particularly if you do not understand how to trade the underlying stock. In most cases, individuals take on more leverage than they can handle and get their information from all the wrong places. Unfortunately, ignorance leads to over confidence, especially if the person has been successful in other areas of their life. Over confidence leads to over trading or trading short term, and making poor decisions based on the perception that the trader is bullet proof. The reality is that most only find this out when they lose their money.

Common themes among those learning the stock market

A common theme among many traders who fail when learning the stock market is that they falsely believe they can get rich quick using very little money or time. This get rich quick mentality is perpetuated by many educators in the stock market. Sadly, while this is a romantic idea, it is a fallacy to think that a trader can be successful without a proper education, and the right skills and experience. The market doesn’t care how much you think you know or that you might only have a few thousand dollars, it just does what it wants to do irrespective of whether you make money or not.

Learning the stock market is a journey, and after teaching share trading for more than 15 years, I could literally write a book on the mistakes that traders make, which include:

  • failing to set stop losses or setting them too tight
  • over trading
  • over use of leverage
  • poor money management
  • relying on software to make decisions

Einstein once said that 'education is the progressive realization of our ignorance'. In simple terms, I believe this means that we don’t know what we don’t know. In my experience, the majority who trade the market do so with little knowledge, blissfully unaware of what they don’t know until it costs them a lot of money. 

Trading on the emotions of fear and greed

While space does not permit me to fully explain the common mistakes that traders make (as mentioned above), what I will say is that the emotions of fear and greed rule all five. A major trap for traders learning the stock market is the tendency to act on emotions rather than logic. In other words, they either don’t trust themselves, their skills or their trading plan, which stems from having a low level of knowledge, skill and experience. 

quote from Dale Gillham on fear and greed when learning the stock market - An educated trader is never greedy nor fearful of the market...rather they embrace the opportunities when they present themselves.

The end result is that the trader acts through a fear of losing and ends up taking a micro view of the market by watching their trades daily or even intra-day or worse they make their decisions based on short term market volatility. This leads to an even bigger sin of over trading, as the trader chases the market in an attempt to regain lost capital or profit.

The fear of losing is amplified when there is little or no strategy in place and contrary to popular opinion, daily charts only show you the short term movements of the market, and as such, I believe they are of limited value to the majority of traders. The use or over use of daily charts is a major reason why so many over trade, as many more short term triggers become evident. Yet properly assessing the trend of the market is almost impossible on a daily chart and hence why most traders fail.

An educated trader is never fearful or greedy

I have often said that if you want to learn what the 10 percent of successful traders do, find out what the 90 percent do and don’t do it. You don’t have to be Einstein to figure out the majority of courses, books, software and websites out there that teach you how to trade espouse daily charts and trading daily or intra-day. They do so because it sounds sexy and, therefore, appeals to people’s greed or ‘get rich quick’ mentality. If it was as simple and easy as they make it sound, then everyone would be a profitable trader. However, if you truly want to be successful in the market, I strongly recommend you stay clear of using daily charts.

The use or poor use of leverage leads unskilled traders to trade on emotion, to set stop losses too tight and to make emotional decisions. This is very evident with those who attempt to trade highly leveraged markets, such as Contracts for Difference (CFDs), Forex, options and other leveraged instruments. Unless you can prove to yourself that you are consistently profitable trading shares using cash, then in my opinion you should never attempt to trade these highly leveraged markets. 

Ignorance and overconfidence abounds in these areas, as people often mistakenly believe that they can handle the fluctuating extremes that leveraging presents. But in leveraged markets you can make or lose 100 percent in hours or minutes, and as such you need to have highly developed skills to handle this. For most, trading leveraged instruments is like giving the car keys to a 10 year old and telling them to go play.

How to be successful when learning the stock market

If you want to be successful in the stock market, you need to develop a trading plan and learn how to stick to it. A trading plan must have your buy/sell rules, money management rules including stop losses, and how you intend to manage the trade. All too often I have asked inexperienced traders what their plan is and they either don’t have one or I get a very vague explanation.

Developing a profitable trading plan is critical to your success as a trader, and once you have developed this, you need to rigorously test its effectiveness. Trading is not about finding a new indicator or tool that someone tells you will make you more successful, it is about having a simple plan and following the plan. And while I encourage everyone to gain an understanding of various tools, it is important to remember that if you change your trading plan you change its effectiveness, which may not be for the better. Therefore, every time you change your trading plan, you need to back test it. If you are not willing to back test your trading plan, you are gambling with your money and increasing the probability that you will join the 90 percent of share traders that lose.

It may surprise you to learn that I do not trade using common lagging technical indicators such as MACD’s or moving averages. I find that relying on the latest techniques or computer generated indicators is of limited value. Instead I prefer to use the tried and tested techniques and strategies of masters such as Gann, Elliott and Dow, to name a few. These techniques are leading indicators and as such they provide more consistent entry and exit signals than lagging indicators.

Using leading indicators means I am better placed to ‘time the market’, which ultimately results in more consistent profits. I understand that it requires a little more work in learning how to apply and use these techniques, but you have to ask yourself, do I want to trade the market successfully or not? If the answer is yes, then the effort is well worth it.

One of the biggest challenges facing traders learn how to trade stocks is when to sell. Usually a trader will be armed with many theories on how to pick the best stocks to enter the market, and in my experience they spend about 80 percent of their time trying to find these trades and very little time working out when to exit. When I ask where they should exit, I often get a confusing array of responses that are, in most cases, more guess work than solid theory, or based on the fear of losing either profit or capital. 

Increasing your probability of success when learning how to trade stocks

sign with the words profit

Traders can dramatically increase their probability of success if they spend more time working on managing their trades and where to exit. That's because trading for profit is about using sound money management rules and good exit strategies, which in essence, is about following the golden rule of let your profits run and cut your losses short.

When setting a stop loss it needs to be far enough away from your entry price to allow the trade to settle in to the trend, but close enough so as to protect your capital. Regardless of whether you are trading or investing, everyone needs to use a stop loss or have an exit strategy each and every time they trade. Failure to do so will result in taking unnecessary risks, less profits and larger losses. 

There are various stop losses you can use depending on what you are trading. For example, the stop loss I use for blue chip shares is different to the one I would apply for a speculative share or CFD. As a general rule of thumb, I always set my stop loss 15 per cent below my purchase price when trading blue chip shares although this will vary depending on the volatility of the stock.

No matter what your goal is when it comes to trading, it is essential to your longer-term success as a trader to not follow the herd, or the 90 percent of traders who fail, but rather follow the rules and principles of the successful 10 per cent. To finish up I will leave you with my top 10 share tips for traders and investors to profit from when learning how to trade stocks.

  1. Don’t dollar cost average
  2. Don’t buy stocks just because they appear cheap
  3. Don’t buy and hold
  4. Don’t over use leverage
  5. Don’t be affected by the herd mentality
  6. Use stop losses to protect capital and always manage your risk
  7. Buy only top quality stocks
  8. Trade well, not often
  9. Diversify but not too much
  10. Lastly and most importantly - educate yourself!

Others who read this article also enjoyed reading: 

My latest award winning bookAccelerate Your Wealth, It's Your Money, Your Choice is packed with many simple, but powerful investment strategies that will provide you with the confidence to invest directly in the stock market.

And If you would like to learn how to trade stocks with more confidence so that you profit on a consistent basis, view our trading courses. You can also check out what our clients have to say by viewing their reviews, success stories and testimonials.

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