Everyone dreams of making a lucky stock trade and hitting it big, but for most traders, that’s not the reality. In truth, becoming a successful stock trader requires extensive knowledge, research, discipline, and patience. Investing isn’t about quick riches—it’s about gradual wealth accumulation. This is an important mindset for newcomers to the stock market who may be wondering if trading is right for them. While trading individual stocks can be both exciting and profitable, it’s also challenging. Here are a few key considerations when using the best stock trading apps to invest.

An Overview of Stock Trading

Stock trading involves buying and selling stocks over a short period to capitalize on quick, significant profits by taking advantage of short-term price fluctuations. This is different from stock investing, which focuses on building wealth gradually by holding assets over a long period. While investors typically buy stocks and hold them for years, traders may only hold them for an hour, a day, a week, or a few months.

Successful stock trading requires time, dedication, and a solid strategy. For beginners, it’s wise to avoid day trading and instead consider longer-term stock trading approaches. Day trading is often the worst choice for new investors, as for every person who strikes it rich with a lucky trade, there are thousands who lose money trying the same method. However, if you’re intrigued by the excitement of short-term trading and the potential for profits, here’s an overview of the basics of stock trading and the steps to help you get started.

How Does the Stock Market Work?

Stock prices are driven by expectations of future profits, with the value of each stock determined by supply and demand. Specifically, the price of a stock reflects the supply and demand for ownership in a particular company. The stock market operates largely on sentiment, influenced by numerous retail and institutional investors who react to various factors, such as news events, by buying and selling stocks.

It’s important to understand that the stock market can be volatile, with prices often shifting quickly and experiencing significant fluctuations. Trading is only permitted during regular market hours, from 9:30 a.m. to 4 p.m. ET on weekdays, unless you have access to pre-market or after-hours trading through your brokerage.

Exploring the Different Types of Stock Trading

Stock trading can be broadly divided into two categories: active and passive trading. Active trading focuses on exploiting short-term price movements through a highly technical approach. Within active trading, traders are typically classified as either day traders, who make multiple trades within a single day, or swing traders, who hold positions for a few days or weeks to capture price swings.

Day Trading

Day trading involves buying and selling stocks within the same day, ranging from seconds to hours. While it can be highly profitable, it also carries the risk of significant losses. This strategy is not suited for the faint of heart or beginners. Those considering day trading for the first time should conduct thorough research and due diligence before diving in.

Position Trading

Position trading is a long-term approach that focuses on the overall trends of stocks rather than short-term price movements or market news. It contrasts with day trading, as it involves purchasing shares and holding them for an extended period, ranging from weeks to years.

Position traders often use both technical and fundamental analysis. This includes evaluating a company’s financial health, such as its revenue and earnings, to assess its intrinsic value. By doing so, traders can determine whether a stock is undervalued or overvalued.

Swing Trading

Swing trading involves purchasing securities and holding on to them for several days or weeks, aiming to profit from a swing or upward movement in the market. Swing traders often rely on technical analysis, which examines price movements and trading volume to identify trends. By analyzing a security’s past price and volume data, traders using technical analysis believe they can predict its future behavior more accurately.

Scalping

Scalping is an ultra-short-term trading strategy where traders make numerous trades throughout the day to capture small profits. A scalper might execute hundreds of trades daily. The logic behind this approach is that profiting from multiple small price movements is often easier than relying on a single large movement. Traders using this strategy aim to secure many small wins each day. They must be prepared to exit a position, even if the stock is rising, with the understanding that they can always buy back later if the price continues to increase.

Must-Know Stock Trading Strategies

Fundamental and Technical Analysis

Fundamental analysis involves assessing a company’s core financial health, such as its revenue, earnings, and other key metrics, to determine if the stock is undervalued, overvalued, or fairly priced. Unlike technical analysts, who focus on statistical trends and chart patterns, fundamental analysts begin their evaluation with a company’s financial statements to understand its true value.

Technical analysis involves analyzing a security’s price and volume history to predict its future price movements and identify optimal entry and exit points. By examining past price trends, traders can recognize patterns that help them forecast future price behavior.

Although fundamental and technical analysis are often viewed as opposing methods, combining them can provide a more comprehensive understanding of the markets and enhance your ability to assess the direction of your investment. Specifically, you can use fundamental analysis to identify stocks that are undervalued compared to their sector or the broader market, and then apply technical analysis to determine the optimal time to purchase shares of those stocks.

Trend following

A solid stock strategy is trend following. If you identify a stock in a clear uptrend, you may be able to buy shares and profit from the continued upward movement. A stock is in an uptrend if it consistently reaches higher lows. Once you’ve spotted this trend, purchasing could be a wise decision. However, it’s important to consider that trends don’t stay the same forever. If a stock is in a downward trend, that may eventually reverse, leading to an upward trend that could present a good buying opportunity.

Momentum Trading

Momentum traders aim to profit from trends in a security’s price. If a stock is trending upwards, it is likely to continue rising until the momentum slows down, signaling the time to sell. Similarly, if a stock is declining, it often continues its downward movement, presenting opportunities for traders to capitalize on the downward trend.

Risk Management

There are various techniques you can use to manage the risks associated with trading, and one of the most fundamental strategies is diversification. The old saying “don’t put all your eggs in one basket” applies here—avoid investing all your capital in a single trade. Many traders follow the “1% rule,” which suggests that no more than 1% of your total trading capital should be invested in any one trade, helping to minimize the potential impact of any single loss.

Another strategy for managing risk is using put options, which are derivative contracts that give you the right to sell an underlying asset at a predetermined price within a specified time frame. By purchasing both shares of a stock and put options for that stock, you can sell the put options if the stock’s value decreases, helping you recover some of the losses from the price drop. Additionally, it’s crucial to have a plan in place before entering a trade. This includes determining your exit strategy—deciding when you will close your position—before you even make the trade.

Real-Time Market News

Real-time market data can significantly impact the success of your trades, helping you make informed decisions. Fortunately, there are numerous free sources of this information to support your strategy and execution. For instance, you can access free, real-time market data from platforms like Nasdaq and the New York Stock Exchange. Finance-focused websites are also valuable resources for up-to-date market information.

Choosing the Right Brokerage

When selecting the best online brokerage for your needs, it’s important to assess your specific requirements. If you’re just starting out, educational resources and training might be crucial. However, if you’re a more experienced trader, you might prioritize a brokerage that offers advanced charting tools and features to enhance your trading strategy.

Use Stop-Loss Orders

Another risk management strategy is using stop-loss orders, which automatically trigger a trade (buy or sell) when an asset reaches a specified price. For instance, if you set a stop-loss order on a stock, it can help manage downside risk by protecting your investment from significant value declines.

Margin Trading

Leverage refers to borrowing money to increase your potential returns, and in the context of stocks, it involves margin trading. This means taking out a loan from a broker, with your own capital acting as collateral. Leverage allows you to amplify your profits by controlling a larger position with less capital. However, it also increases the potential for greater losses if the market moves against you.

How to Begin Trading Stocks?

There is a wealth of information available, but if you’re looking to learn how to start trading stocks, you can begin by taking a few straightforward, practical steps.

How to Open a Trading Account

To start trading, you’ll need a broker to execute your trades, so it’s important to choose one you trust and feel comfortable with. There are plenty of options to consider, and as you select a broker, make sure it offers tools, features, and an interface that suits your trading style and experience. Other key factors to keep in mind include fee structures, mobile accessibility, stock analysis tools, and educational resources.

For beginners, it’s essential to pick a broker with a broad range of offerings and solid customer support for when challenges arise. If you’re unsure where to start, check out our recommendations for the best stock trading apps.

Creating a Solid Trading Plan

Planning is key to successful stock trading. Start by clearly defining your objectives. Why are you trading? Are you aiming to generate extra income, or do you have more long-term financial goals? Another important factor to consider is the amount of time you’re willing to dedicate to stock trading. Do you plan to trade full-time and rely on it as your primary source of income, or do you prefer a more part-time approach that fits around your other commitments? Establishing these goals upfront will help shape your trading strategy and approach.

Another vital aspect to deliberate is your risk tolerance. This will play a significant role in the types of stocks you choose to trade, as some companies are inherently riskier than others. Once you have a clear understanding of your risk appetite, it’s important to establish trading strategies and risk-management techniques that align with your goals. This might include setting stop-loss orders, diversifying your portfolio, or employing specific technical or fundamental analysis methods to guide your decisions.

The Benefits of Paper Trading

After creating your trading plan, it’s a good idea to test it with paper trading, which allows you to practice without risking real money. This approach lets you experiment with your trading strategies and observe the potential returns and losses they could generate. For instance, you could use paper trading for several months to gain confidence in your approach before transitioning to live trading with actual capital.

Top Mistakes to Avoid in Stock Trading

Excessive Trading

Overtrading happens when an investor trades excessively, often driven by emotional impulses. A common example is “revenge trading,” where investors make numerous or large trades in an attempt to recover losses. This strategy can quickly lead to significant losses and accumulate high trading fees, making it a dangerous cycle for traders to fall into.

A key way to manage the risk of overtrading is by practicing self-awareness. If you notice yourself becoming emotional or attempting to recover recent losses through excessive trading, it should serve as a warning sign. Additionally, establishing and adhering to a strict risk management plan can help, such as setting limits on the size of positions you take in trades to prevent impulsive decisions.

Avoiding Emotional Decision-Making in Trading

Experts agree that allowing emotions or biases to influence your investment decisions is one of the most detrimental things you can do. Emotional trading is one of the most common ways investors harm their returns.

It’s essential to create a trading plan and follow it, rather than letting emotions take control. Allowing emotions to dictate your actions can lead to issues like irrational exuberance (unrealistically high expectations for an asset) or getting swept up in market panic. Both individual stocks and the broader market can remain oversold or undersold for extended periods.