It is often assumed that trading is a gamble that has many risks. But this is a misperception. Here are 7 ways trading can be a viable side income when it is done right.
1. Cap it at 10% of savings
The key to trading is not to make as much profit as possible but to effectively manage risk. Putting in a maximum of 10% of your savings will limit any loss.
Trade with money that you have; don’t top up your account if you make a loss. If you put in RM3,000 and lose RM500, you should only trade RM2,500 the next time.
2. Make short trades
Don’t make trading your main source of income. Make short and quick trades in about 30 minutes, and always prioritise your main job.
Within the Malaysian market, you can trade before work from 9am to 9.30am, or at lunchtime from 12pm to 12.30pm.
Within a short period, prices can move by 2% to 5%. With a capital of RM3,000 you could make RM60 to RM150 in profit, assuming you are trading investments for that given day.
3. Choose the right investments
Select investments that are or will be hotly traded. This will require research into asset classes that are getting attention. News sources on potential price movements include:
- Quarterly financial publications
- Award of contracts
- Government policy announcements
- Economic indicators publications
There can be a tussle between people who are positive and negative, where prices are volatile. Learn to identify which direction prices will go in.
4. Respect your stop loss
A stop loss refers to the maximum loss you can incur before you exit the trade. People like to tell themselves that the price will recover, but the reality is that it could decline further, exacerbating your loss and completely wiping out your capital.
Set your stop loss at 1% to 2% below your investment price.
5. Implement the right strategy
Identify a trading strategy, taking into account how the prices have been behaving and the overall sentiments of investors.
If prices have consistently been increasing over a certain period, you could implement an ABCD strategy:
- The price increases to a certain level (point A).
- Price does not go up further but stabilises around a certain level (point B).
- Once it is stable, buy the investment at or slightly below point B (point C).
- The price increases again (point D).
6. Use simple indicators
Trading in the market requires you to understand how to use technical indicators, but it does not have to be complex. Some basic indicators include:
- Moving average
- Relative strength index
- Standard deviation
7. Stick to the plan
Once you have a plan, do not deviate from it. Practise patience and discipline. Wait for the right conditions before implementing your trade, and execute it according to criteria such as your stop loss and target profit.
If the trade does not go as planned, you should exit right away.
This article first appeared in MyPF. Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.