Trading Rules for Beginners

There is currently a significant increase in the number of retail investors and the flow of funds into stock and other financial markets. However, the overwhelming majority of new clients have no market experience. To avoid losing their investment capital in the early days, they should adhere to a few simple rules.

From this article, you will:

Understand why a well-structured investment plan with specific goals, funding sources, and investment horizons is crucial for achieving financial success.
Explore the pros and cons of different fund management methods, including self-directed trading, trust management, and structured solutions, and discover which method suits your needs best.
Gain crucial recommendations for novice investors, including the significance of education, starting with simple financial instruments, and adhering strictly to investment strategies and risk management practices.

Table of Contents

Important Recommendations for Beginner Investors

Numerous aggressive advertising campaigns by brokers, investment managers, individual traders, and investors are aimed at attracting new users, who usually lack knowledge and experience in financial markets. Their main goal is to convince new clients to bring their money, which ultimately becomes a real source of income for the advertiser. The primary tool to achieve this is to create the impression that investing is easy and that those who take this step will achieve dizzying success and fabulous profits by tomorrow.

In reality, things are quite different. Investing and trading on financial markets are high-risk activities, where one can quickly lose all invested funds. Earning and receiving a stable income is quite possible, but:

The actual profit size, especially for beginners, is generally significantly less than what is promised in advertising videos and banners.
Without a certain level of knowledge, the venture may fail, and the likelihood of losing investment capital is high.
To avoid disappointment and become a successful investor, one must follow a limited set of simple rules.

Invest Only Funds That You Can Afford to Lose

Before investing funds, an investor should consider a very likely situation where the entire allocated amount is lost. A decision is considered correct only if it does not cause significant material damage or lead to severe financial consequences.

This basic rule can be easily followed by considering a few more specific recommendations:

Do not invest borrowed funds. Investing money obtained as loans and credits is not recommended even for experienced and professional traders. For beginners, who lack the necessary experience and preparation, this is absolutely unacceptable. They should understand that losing these funds is not the worst; it will be much harder to gather the amount needed for repayment, especially with interest.
Do not invest the last available free money or the entire income amount. Failing to follow this will lead to a significant decline in the quality of life if the investment capital is lost, and there will be no possibility to respond promptly to life situations requiring financial expenses.
Start investing only after creating a financial reserve. The recommended size of such a “safety cushion” is the income for 6-12 months. This will allow maintaining well-being even in the case of complete loss of invested funds and unforeseen situations in daily life.

Even after meeting all these conditions, the amounts regularly directed towards investments should be limited. Typically, the size of such “injections” should not exceed 20-30% of the average monthly income and 5-10% of the accumulated reserve amount.

Create a Personal Investment Plan

Investing is not a lottery or a casino game where participants can only rely on luck. Real capital growth results from conscious, well-planned actions. One of the main conditions for this is the creation of a clear and understandable program called a personal investment plan.

This plan includes:

Specific investment goals. The formulation “Save money for a new house” is not suitable here. It should include at least the target amount and the time frame to achieve the goal. A correct formulation looks like this: “Save $5 million by 2030 to buy a house in Florida.”
Sources of funding, indicating both the initial invested amount and regular additional investments. It should look like this: “Invest $50,000 saved in a bank deposit. Add $2,000 monthly from regular income.” It is also advisable to indicate if regular additional investments are planned and their amount relative to the average monthly income.
The maximum permissible period for achieving the goal (investment horizon). Although partially mentioned in the goal-setting section, it should be clarified. First of all, it is necessary to determine the maximum term. This is required in case of negative market developments – if the goal cannot be achieved within these time frames, the plan will need to be drastically adjusted. For example, the goal was to secure funds for a child’s education at a prestigious British university by 2025, but due to the “COVID” crisis, the planned returns were not achieved. The deadline for achieving the goal cannot be shifted, so investment strategies will need to be revised.
Investment profile. This is a kind of “portrait” of the investor, designed to answer the questions – what strategy suits them (aggressive, moderate, conservative) and what level of risk is acceptable.

Creating a personal investment profile by oneself is generally difficult. It is better to seek help from professional market participants, such as management companies, whose managers have all the necessary tools for this work.

Make a Thoughtful Choice of Fund Management Method

Today, there are several ways to manage investment capital:

Self-directed market operations. In this case, the investor analyzes and selects assets, forms a portfolio, and controls profitability and risks. This approach requires a certain level of knowledge and significant time investment.
Transferring funds to trust management. The principle remains the same, but decisions are made not by the investor but by a manager (management company) based on an agreement.
Purchasing structured solutions, such as ready-made portfolios from brokers or management companies. In this case, the investor only needs to spend time evaluating the proposed products.

If the second or third option is chosen, all mandatory recommendations for a beginner end here – they just need to hand over the money to the manager (MC) and wait for the results.

For those who decide to engage in self-investment, there are still a few important rules to follow.

Recommendations for Beginners in Self-Directed Trading

Self-directed investing is the most challenging path for a novice market participant. However, this option is recognized as the most effective, capable of providing maximum returns. In this case, the investor retains the freedom of maneuver, allowing them to achieve any set goals. However, realizing these opportunities is closely linked to strictly following rules and recommendations:

Education is mandatory, and it should not be skimped on. Self-directed investing requires mastery of various analysis methods and decision-making mechanisms. Without knowledge and experience, success does not come. Experience can be gained through actual trading, but knowledge must be gathered. Educational courses and programs, of which there are many today, will help with this. The only condition is to carefully choose sources and, if necessary, pay for them. Such investments in personal education will surely pay off.
Do not immediately chase high-yield assets whose workings and risks are not yet understood. In this regard, a beginner should heed the recommendations to start with simple financial instruments accessible to unqualified investors. Reliable stocks, bonds, and funds are sufficient to solve any investment tasks. Transitioning to other instruments can be done as knowledge and experience are accumulated.
Choose a strategy and trading system and strictly adhere to the rules. Success in investing largely depends on discipline – if the user precisely follows the rules of capital and risk management, as well as portfolio rebalancing and restructuring, they are likely to achieve the necessary returns with minimal risks.

The key points in the last section are capital and risk management. They determine the options for asset diversification, the calculation of transaction volumes, and the optimal moments for making trades. Publications with detailed analysis of these topics are easy to find online. It remains only to spend part of your own time studying these materials.