Pretty much everybody would love a side hustle that brings in some extra cash every month. I’m sure many FM readers have wondered about making money that way. How hard can it be? Surely the money will just flow into your bank account?
But if it really is so easy, why isn’t everybody rich already? Because, despite what social media tells you, it’s hard.
First let’s define trading. It’s about short-term transactions, not long-term investing. For me, short term is anything less than three years.
What you trade is entirely up to you. There is a fascination with foreign exchange, but that’s a guaranteed way to lose money. It could be shares, indices, commodities; anything that is traded on regular markets can be traded short term. But when you start, do not include any derivatives — that would be like trying to learn to swim by jumping into the deep end with weights tied to your ankles. Trading is a skill, and you’ll need to learn how to do it, which could take years.
The key features of trading, aside from it being short term in nature, are the psychology behind it and money management.
It is the psychology that trips many people up because base emotions such as fear and greed are involved. Being comfortable losing money in a trade is an absolute must for a trader — but it’s not a natural emotion for humans. Being comfortable cutting a loss-making trade, locking in that loss, lies at the heart of risk management; it’s about limiting downside so that you live to trade another day.
Greed is the other challenge, but trying to get rich quickly means risk management goes out the window and that will just see you bust out.
So the key to trading is discipline. You need a simple strategy that includes strong risk management, and then you need to stick to it. It’s about doing the right thing at the right time for the right reason. That’s easy to type but hard to do. How disciplined are people in general? Do we attend gym regularly? Always eat healthy? Drink in moderation? We know these are all important, but do we do them consistently?
So, where to start? Indices. They’re less volatile and not as susceptible to single-event shocks such as an earnings miss or a fired CEO. And the easiest way to trade indices is via ETFs.
Pick a bunch of local or offshore indices and start looking for patterns in the charts. Try to identify moves before they happen by using some moving averages. When that’s working, start trading with a limited amount of capital. Set exits for when you’re wrong and remember to take profits.
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