10 Stock Market Tips To Avoid Heavy Losses For Beginners

The biggest problem with beginners is they tend to blow up their accounts. Most beginners start out by reading advertisements in the newspaper or online advertisements. They hear about how traders can make $2000 a month with minimum work. The next thing they do is sign up for a trading course.

They open a brokerage account. Then they take their first few trades. And the next thing they know, they have lost almost all of their money in the account.

If this is what happened to you, here are 10 stock market tips to help you avoid blowing your next trading capital.

1. Get As Much Trading Education That You Need

Trading education is not just about getting into a trading course. You need to read as much as you can. Read trading websites, read trading books, read the Market Wizards series by Jack Schwager, read blogs by real traders, read financial websites.

When you first get started try not to spend thousands of dollars on trading education. It's alright to spend a few hundred dollars but don't spend more than $1000. There are so many trading books out there that are very affordable. There are also tons of free videos and free materials out there.

Investopedia is a good place to start. You might even want to try the free Trading Course we have on this website.

Get as much trading education that you need. Never stop learning. Make sure you read at least a few articles on trading and the stock market everyday.

7 Reasons Why Trading Is One Of The Most Difficult Profession In The World

2. Have A Trading Strategy

The next thing you need to have is a trading strategy.

A trading strategy is actually a blueprint for success. If you do not have a plan, you are planning to fail. Period. 

Trading strategies show you:

  • What stocks to look for
  • What setups to look for
  • When to enter
  • Where to put a stop loss
  • When to take profits

If you do not have a trading strategy, go and learn a few. Experiment with day trading strategies and swing trading strategies and position trading strategies and find out what fits you. Want to learn some trading strategies? Check out our Trading Strategies page.

Why You Need A Trading Strategy To Profit From The Markets

3. Focus On One Trading Strategy

If you are just starting out, make sure you focus on one trading strategy. Do not make the mistake of trying out 10 different trading strategies with real money. You will end up ditching the strategy if it does not work out immediately.

Some traders can double, triple or make their account grow by 10 times just by using only 1 trading strategy. All you need is one proven and time tested trading strategy and you will be able to pull money out of the markets consistently.

If you are an experienced trader, its fine to have 3, 5 or even 7 trading strategies. But if you are just starting out, its best to master 1 trading strategy before moving on.

Why Its So Important To Specialize In The Stock Market

4. Practice With A Virtual Account

Once you have chosen 1 trading strategy to specialize in, you need to validate the trading strategy by practicing it with a virtual account. You won't know whether the trading strategy works for you or not until you try it in the real markets.

The best way to try out the strategy without hurting your bottom line is to use a virtual account. Most brokers will offer you a virtual account. Ask them about it.

If you do not have a broker, try the Investopedia Stock Market Game

I recommend that you sign up for a real brokerage account and get their virtual trading because you can try out the trading using real live quotes. 

5. Be Consistent In Making Money

Try to be consistent in making money using a trading strategy in the virtual account before using real money. You will notice there are lots of mistakes that you will make.

Mistakes such as:

  • Overtrading
  • Not following trading setups
  • Not following trading rules
  • Revenge trading
  • No discipline to put on the trade
  • Fear in putting on the trade

Usually, these mistake will result in your account going smaller. If you are growing your virtual account, you know that you are doing things right. Try to be consistent for at least 3 months before trying it out with real money.

6. Trade Small With Real Money

Once you are successful in making consistent profits in your virtual account, its time that you graduate and play with real money. Do not go all in and risk $1000 per trade or whatever big amounts you dream of making. Start small.

Risk $100 per trade. Risk $200 per trade.

Notice your emotions and how you react to wins and losses. Record them down in a journal.

  • Are you able to control your emotions when you lose money?
  • Are you able to still follow the trading rules after a series of losses?
  • Are you revenge trading?

There will be many many questions that you need to answer. Take note of how you feel and the decisions you make when you trade with real money. If you are not able to grow your account with real money then there is something wrong with your trade discipline.

Try to find the cause of the loss. Perhaps you are too attached with your hard earned money and you are not able to think clearly compared to the times you are paper trading.

7. Have A Stop Loss

One of the things that will keep you from blowing your account is stop losses. They are a life saver when it comes to trade management. Trust me. When you are playing with real money, you won't be able to think straight most of the time. Beginners will face these kind of problems and having a stop loss will be a life saver for you.

Always honor your stop losses. Put the stop loss in right after you place the trade. Lots of traders blow up their account because they never have stop losses.

8. Limit Your Trades

If you want to avoid heavy losses, you should limit your trades.

What this means is you should keep the number of trades within the optimum amount of your trading strategy. Once you have developed a trading strategy that fits your personality, you will notice when "over trading" makes your account suffer.

For instance, your day trading strategy will only give you 2-3 good trades each day. If you try and do 6 trades a day, you will be forcing the trades. A low quality setup is taken and you suffer heavy losses because of over trading.

A swing trading strategy may only give you 3 nice trades a week. But a trader who over trades will take 8 swing trades a week and suffer losses.

Never underestimate the bad effects of over trading. If you have a trading journal you will probably notice that the losses you have are a result of taking trades that do not have a high quality setup.

9. Risk Only 1% Of Your Trading Capital On Each Trade

Risking only 1% of your trading capital is proper money management. You might increase it to 2% or even 3% depending on the frequency of your trades. A day trader might want to risk only 1% per trade while a swing trader might risk 3% - 5% per trade.

Rather than finding a home run, it is best for traders to slowly grow their account. A series of 2% wins will grow into a 10% gain in your account. If you risk big, you might win big but if you lose, your account will suffer a big draw down. If you risk 30% of your capital in one trade, you will only have 70% of your capital left if the trade does not work out.

If the stock gaps down heavily, that 30% might turn into a -120% loss for your trading account. But if you risk only 1% per trade and the stock gaps down heavily, you might only lose 4% of your trading capital. Which leaves another 96% of your trading capital intact so that you can make back what is lost.

10. Refine Your Approach

The best gauge of whether your approach to the markets is good or not will be you PnL. If you are making money consistently, then stick with that approach. On the other hand if you are losing money consistently then its time to wake up and do things another way.

It will be stupid to imagine you can get great results by doing things the same way again and again. Losing money is a sure sign that you should change. Refine your approach, change it if you have to. The best way to grow your account and not blow it is to continuously refine your approach to the markets.

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