Imagine that you were a kid again, standing outside of your house. As you’re standing there, you looked up at your house and truly believed you could jump onto the top of your roof. You bend your knees and get prepared to launch yourself into the sky, and slowly jump up…
You make it a whopping 1 foot off the ground.
An absolute utter miss…
Oooops! Well that didn’t go as you had hoped!
In short, that’s basically how my first month of trading felt! Now before I get into more details, my experience and the valuable lessons that I had learned in my first month as a stock trader, let me share with you a short pre-story first.
This is just to give you an idea of where my knowledge and experience was at with stocks, before I finally made that first trade.
Believe it or not, I had actually wanted to open up a stock trading account for a reaaaally looong time. This desire came from me being on the sidelines watching the bull market go up and up since around the financial meltdown. I had only ever paid attention to the US stock market.
So going back more than 10 years ago!
That’s a looong time to be waiting…
During that time, I did learn about some of the basic numbers to pay attention to and how to read stock charts. That was the extent of my knowledge.
And back in 2018, I had finally pulled the trigger and opened up my first trading account with an American brokerage firm.
However, I never made a single trade with it.
It wasn’t until my brokerage firm had threatened that they were going to close down my account, unless I made a deposit into it, that I took some action. This notification had kicked my butt into gear and I was finally going to dip my toes into trading in early 2020…
That is until I found out that I had no way of transferring funds into my account.
So instead… my account got shut down and I had to find a new brokerage firm.
When I did find another one that fit my needs, I encountered another problem. Since I had recently moved to a new country and couldn’t figure out how to get my tax number (which was needed in the application process), I wasn’t able to open up an account.
And that also meant I missed out on pretty much all of the surreal stock gains after stocks had bottomed out in the early 2020 market crash.
When I finally did get my tax number, it wasn’t until early November that my account was fully set up and ready to use. I did suffer some delays because of the verification process.
And did I jump right into making some trades?
It took me about another 3-4 weeks before I finally pulled the trigger on my first stock buy.
Unfortunately for me, the gains in November were really good and since I bought near the end of the month, this also meant that I had bought right around/close to a peak.
Yet… that didn’t matter to me.
I had high expectations. I was aiming to get a 60% return before the end of the year and I would be satisfied if I only got 20% in the end. I had a lot of faith and confidence in my unproven abilities.
In hindsight, I find it very hilarious of what my expectations were versus the reality of what actually happened.
Shortly after I started trading, my goals quickly became….
Try not to lose anymore money this week
Try to make at least 1 profitable trade
It is funny how a bit of a humbling experience goes a long way. You get to learn through these so-called “experiences”.
Within my first week or so of trading, I had already lost $18 and my unrealized balance was at negative $10.
So I was off to a pretty good start… NOT!
Most of my first month was spent in the red and I barely saw any green!
This was NOT how my trading was supposed to go.
Yet other stocks had appreciated by 25% or more in that same time frame. Yet, I couldn’t even manage to get a single percent…let alone 25%!
What was wrong?!?!
I was playing the short term game and trying to game the market. I was looking at the stock charts, trying to understand the story and purchasing stocks that seemed like they were going to shoot up.
I ignored all the fundamentals. I didn’t care about the news, the financials of the company or even the P/E ratio. I just looked at each stock’s story and invested in ones that looked favourable when charted over a 6 month period.
When I was learning the theory behind doing this, it was all very intuitive and nice. The so-called “experts” made it sound easy. But the reality was that it isn’t that simple to pick individual winning stocks. Especially not if it is in the short term (a few days to a few months). Maybe you get lucky and maybe you don’t.
Yes, I know! Some people manage to make a living out of doing just that, but it is a minority.
As a beginner, I of course made a few mistakes. You can’t become good until you get more experience. And these mistakes (which I will share with you next), have provided me with some valuable learning experiences.
1. Stock stories are just guesstimates:
I don’t care what someone else tells you, but there is no way to predict if the stock is going to go up or down tomorrow. All the lines that you can draw, support/resistance levels, moving averages are all just manufactured ways to make you believe that you can reasonably estimate what a stock is going to do next.
The thing is you can’t! Nobody knows.
These analysis techniques are quite addicting to do and if you are going to play the stock story short term trading game, then you need to accept that your results could be more a result of luck than what the stock’s story is telling you.
Yes, sometimes they do work and hold true.
Maybe in my case… I just needed more practice and experience?
Or maybe more luck?
Or maybe it only works when all stocks are going up?
Maybe in a few years my opinion will be vastly different on this!
2. Don’t buy a stock that has already gone up, up, and up in a single day
While this one might seem obvious from a distant perspective, I certainly fell into this trap. It was actually part of the reason why my first full trade (buying & selling) was at a loss!
While it was only 18 bucks, it still stung!
So what happened?
I was too focused on what was happening in 1 day, instead of having a half year outlook.
I was focused and zoomed way too far in.
My intentions were never to be a day trader, and I was precisely doing just that. Except… very poorly!
I wanted to be more of a swing or longer term trader. Where I might hold onto a stock for 1 week, a few months or possibly years.
That is what I wanted to do and I broke that.
Instead, I saw a stock breaking out. It was climbing and climbing throughout the day. I was being super tentative in wanting to buy it and when I finally did muster up the courage to buy the stock… I had bought it right at the peak.
The stock, to my dismay, did not keep skyrocketing up (and here I thought stocks only go up when they have momentum). Instead, it fell and closed much lower at the end of the day.
Over the next few days, the stock kept falling and eventually triggered my stop loss. So in a matter of a few days, 18 dollars was gone from my account!
I had thought to myself…
Why is it so easy to lose money!
And one last thing…
Similar to the law of gravity, what goes up (too rapidly) must come back down (to reality). Parabolic lines in stock charts are not sustainable and will eventually reverse.
Be afraid. Very afraid!
3. Understand all the trading terminology before you start
This was the other contributing factor to me losing 18 dollars. I didn’t fully understand, or read the details, of how a stop limit worked.
I had thought that I was being smart by setting a stop limit to limit my potential losses, but instead it ended up screwing me over.
A couple weeks later, the stock had bounced back up and I would have had at least a 15% return.
So what happened?
Well I had written the numbers in essentially reverse order. The value that converts your stop limit into a limit order and the minimum price you want to sell your stock for.
I understood that I could set a limit order price of say 85 and a minimum price of 80. I thought that way if the stock stays above 80, it won’t get sold.
Instead, as soon as the price hit 85, the stock was sold! Because it is minimum price and the minimum price should be set above the limit order price.
Oops… my mistake!
In hindsight, I should have just used a stop of 80 and that would have sold my shares if the price had fallen down to that point (which in my case it did not).
Or I could have done the stop limit and set a stop price of 80 and had a higher value (say 85) for the limit price. I would want to do something like this if I thought the price would only temporarily bounce back up a bit, after falling to 80 or lower.
Let’s just say that it was a good learning experience for me.
So how do all of these terms actually work?
Market: this will sell your shares immediately at whatever the current market price is.
Limit: Set a price ABOVE the current market price, and if that price is reached, it will sell your shares.
Stop: Set a price BELOW the current market price, and if the price falls to that point, it will sell your shares.
Stop Limit: First set a stop price BELOW the current market price that converts your order into a limit order. Then set a second price ABOVE the stop limit price, and if that price is reached, it will sell your shares.
Market: this will buy shares immediately at whatever the current market price is.
Limit: Set a price BELOW the current market price, and if the stock price falls to that amount, it will only then buy those shares.
Stop: Set a price ABOVE the current market price, and if the price reaches that point, it will buy those shares.
Stop Limit: First set a stop price ABOVE the current market price that converts your order into a limit order. Then set a second price BELOW the stop limit price, and if that price is reached, it will buy those shares.
If you want to trade, you better know exactly what these terms mean and how to use them!
4. Know when to sell
Sometimes taking a measly profit on a trade is better than taking a loss later on.
Of course this all depends what kind of trader you are (day, swing or long term). I’m solely speaking here from a swing trader perspective.
In my first month, I had 2 scenarios play out where I should have sold (or was forced to sell at the wrong time).
What do I mean by this?
Well… I lost $18 because my stop loss was triggered. But… if that didn’t happen and I had just held, I could have closed my trade at a $20 gain instead a few weeks later.
I know… that is a lot of IFs, but we learn from our mistakes.
Knowing when to sell is the HARD part. As a swing trader, I believe it is wise to ask yourself how much you can reasonably expect to gain out of a stock, especially if it has picked up some momentum. 5%? 10%? 15%? 20%?
Anymore than that and you should start getting a bit worried. Either sell and be happy with a 15-20% gain in a couple of weeks or a month. Or set up a stop loss to guarantee that you’ll get at least a 10% return and then you can wait and see how the stock price plays out.
Maybe you earn a higher return….maybe you don’t.
Just remember what the bank pays you in interest. Sometimes nothing, oftentimes <1% and maybe you could get up to 2-3%.
So getting a 5% return, or 10% return, on a trade doesn’t sound so bad compared to a bank.
Yes it’s much riskier and not guaranteed, but that’s what you have to do if you want a higher return.
The second scenario when I should have sold, and didn’t, played out like this. The stock initially went up a few percentage points (it was always less than 5%), but it just stayed there. It wasn’t really moving in either direction.
And if I had looked at the stock chart, I would have noticed that it had already peaked a month or so back and seemed to be hitting some resistance at a lower level (possibly forming a peak).
I should have sold and taken my 2-3%, but instead the stock was already at a peak and was slowly starting to fall in a wavy line.
After that point, it was always in the red. I held on as I thought (more hoped) that it would bounce back up.
Update: It never did and I still have it today! (Surprise, surprise… it’s still in the red after half a year later).
5. Stop losses can be your worst enemy
Sometimes we want to protect ourselves from the worst case scenarios, which here would usually mean that a stock completely crashes and never recovers again.
So it would make sense to limit your potential downside and this is exactly what I did with that stock I had lost $18 on.
I had set a stop loss and thought, I’m sure the price won’t fall below this support level and also thought I was doing myself a favour.
If the stock doesn’t do what I thought it would, I would take a smaller loss than a larger one.
However, the things that you need to take into account are price fluctuations and price swings. If a stock is pretty volatile it makes no sense to set a tight stop loss limit. Most likely it will get triggered and you will end up with a whole bunch of losing trades.
Not good at all!
So setting stop losses are very tricky and I think this is something that will come with experience over time.
It’s a super critical skill to know when to enter and exit trades (for both good and bad ones).
I’m more inclined to believe that you should check your stocks once a day and if it starts going up, then set up a stop loss so you would at worst still earn some kind of profit at the end.
I’m still not certain what the best strategy is for stocks that begin going down. Maybe it is waiting a few days, or even a week, before you set up a stop loss on a losing trade.
Then you can see what direction the stock is going compared to what you thought it would do. Depending on that answer, you can either wait for a bounce back or simply cut your losses.
6. Invest small amounts at the beginning
Thankfully, I actually followed this and didn’t just dump large amounts of money into a particular stock. I wanted to first prove to myself that I could successfully be a swing (short-term) trader on the stock market.
This meant that I’d either be kicking myself in the butt for not investing a larger amount of money, or I would be thanking myself that I only lost a very tiny portion of my pot. And luckily for me, it was the ladder… at least for now.
The important thing is to not be overconfident and really just focus on learning and figuring out how to trade successfully. As in… making more profitable trades than losses.
Hopefully much more often than not.
I would say that overall, my first month trading stocks did not go as I had planned (more… hoped).
It was definitely a reality check that trading stocks is not easy money. If it is too short term, it is basically gambling and that’s not what I want to do.
Trading stocks profitably seems to be harder than it looks and this is probably one reason why many people just invest in index funds and think super long term (10 years). Because it takes skill to beat the market average!
While I may have been a bit discouraged with how it went overall, I feel that my intuition seemed to be okay from reading a stock’s “story”, but my timing was off!
I’m not sure if this is due to “luck” or if there is some kind of truth behind reading a stock’s story.
We will see…
A quick recap of my lessons learned:
- Make sure you understand all the terminology and how trailing stop/stop losses work.
- If a stock is going up and up (especially in one day) don’t buy at the peak or after most of the gains have occurred in the day. By this point it is already too late, so don’t be tempted!
- Figure out your benchmarks for when to sell a stock at a profit and a loss.
- If you are a swing, or long term trader, don’t fall into the trap of becoming a day trader.
- Try not to set stop losses initially, unless you have enough room to handle the weekly price fluctuations.
- Start trading with a very small pot of money, so you don’t end up with big losses while you’re still in the learning phase.
If you want to keep reading about my stock trading journey, then definitely have a read of my reflections at the three month mark in trading stocks post.
Subscribe to David's Blog
Are you a developer interested in building your own SaaS business?
Get exclusive, behind-the-scenes insights (and first access priority) on my journey and process in building a SaaS business from scratch!
Not sure if this is for you? Then check out my series on my YouTube channel!