Pearls of wisdom from a practising day trader

Six months of mock dealings on a share trading website yields novice a profit of more than 2,253 pounds sterling.

When I embarked on this experiment on June 19 this year, I had no idea whether I would make money or lose it. Could a complete beginner hope to have any success dabbling in the stock market as a day trader?

The answer turned out to be: "Yes. Kind of."

Technology has moved on in leaps and bounds since the height of the Nineties day-trader fad, when wannabe Wall Streeters, convinced they could make a fast buck on the back of the dot-com boom, gave up their jobs and traded offices for hot-desking in the trading centres that sprang up in cities around the world.

Today, the trading centres are no more, thanks to a broadband revolution that has turned every laptop into a trading desk.

As a result, the temptation to dabble is greater than ever, but the risks and realities remain the same. The good news is that there is no shortage of solid information out there, much of it available free on excellent websites, to help you on your way.

I subscribed to one such site, The Share Centre, based in the UK, and opened a practice trading account with an imaginary balance of £15,000 (Dh85,657) to mock-deal on the FTSE in delayed real-time.

In 27 weeks I went from dabbling blindly in something I didn't understand to developing a personal strategy which, as far as I can tell, seems to work pretty well. Even when I was floundering, only once did the balance on my account dip below the £15,000 I started out with, but it was only close to the end that I really started to get it.

Last week, I ended on a high, scalping more than £700 from three stocks to end my inning with £17,253.72 in the bank - £2,253.72 more than I had started out with. Yes, that represents a gain of 15 per cent - far better than the overall market yield, or the interest from any bank account you could name - but let's not get carried away. It also works out at just £83.47 a week.

I don't know about you, but that doesn't even come close to tickling my mortgage.

In my last week, however, when I finally had all my ducks in a row, I made just over £700. Would it have been possible to harvest a similar amount each week? I think so, especially if I had been trading full time, and every day - or, at least, at the start of every day. Am I sufficiently confident in that prognosis to give up my day job, or at least to put real money where my mouth is?

Yes, but only if it was money I could afford to throw away. So no, then. I learnt a lot of lessons the hard way. So you won't have to, here are a few of the key ones, as my festive gift to you.

Learn the game

You wouldn't consider charging onto the rugby pitch without at least a rough grasp of the rules; pile into stock trading without an understanding of the basics and, likewise, you will be madly mauled. There are countless websites offering advice, much of it free, and courses you can take, online or in person. Swing-trade-stocks.com has a lot of very useful information, clearly explained, while if you want to get really serious the Online Trading Academy has an international reputation - and a branch in Dubai's Knowledge Village.

Don't give up the day job

Practice, they say, makes perfect, but when it comes to trading as a novice, practice makes possible. Don't even think about getting into this without a good few months of pain-free simulated combat. Check out The Share Centre at www.share.com or similar, open a practice account and develop your skills and confidence.

The swing's the thing

This is day tradingwe are talking about - not year, month or even week-trading.

You are not a trader, you are a raider - kick down the door, pop the flash-bang, grab the loot and get out of Dodge. You don't care about dividends, earnings or any other fundamentals.

Your best trades will be executed over periods as short as 10 minutes, and probably no longer than a few days.

Sail with the tide

Whether its overall trend is up or down, generally a share price will fluctuate, or retrace, multiple times. The successful swing trader learns to anticipate these potentially profitable movements by reading trading activity. The sudden appearance of red selling bars signals a fall in price, but there will come a point when buyers begin to sniff a good deal and the tide turns green. Be there when it waxes, and abandon ship as soon as it starts to wane.

Don't spread yourself too thin

Tailor the depth of your portfolio to the size of your budget. To sprinkle £15,000 across 10 holdings is a safe option, but remember you will aggregate winnings as well as losses, which kind of defeats the point.

Do this and you might as well put your money in low-risk unit trusts or a low-interest bank account. Or a sock. Also, when you are watching for short-term swings, managing three stocks is a lot easier than herding 10.

Size is everything

The more money you have to invest, the more you stand to win; a 10 per cent swing on an investment of £1,000 is a lot less exciting than the same on a holding of £10,000. Which brings us back to the previous tip.

If you think you are on to a winner, have the confidence to back it with all you've got.

Have an exit strategy

Make two rules and stick to them: the point at which you will sell if a stock starts to fall - small, anticipated losses are much better than huge, unplanned ones - and, equally important, the point at which you will sell once it is rising. Never hesitate to take the money and run: never gamble the certainty of profit against the mere possibility of greater profit.

Start as you mean to go on

You are your own regulator, so from day one of your practice account get in the habit of sticking to this one immutable strategy: invest only money you can afford, set aside a fixed amount and accept from the outset that you are going to walk away with nothing. Never, ever, bankroll a losing streak with additional funds. That's called addiction.

And finally ...

Never forget your friends

By which - if this column has inspired you and you become the next Warren Buffett - I mean me. And in the spirit of that sentiment, have a great new year and a hugely profitable 2011.