Trading: The Basics

Trading the financial markets is, in my opinion, one of the best of several ways to turn the tables of wealth in your favour. That said, the scary fact is that 90% of retail traders lose money and fail at trading the markets. Why is this? Put simply, it’s because they are not trading – they’re gambling. Most people who jump into the markets have no idea what they’re doing, don’t bother to do any research or learn the skills required to be profitable consistently, and then wonder why they lose money hand over fist.

I know this, because that’s exactly the mistake I made when I first started trading.

I learned about what seemed to be a simple strategy using GUPPY Multiple Moving Averages crossing each other in a specific way and jumped straight into the markets with no idea what support and resistance even meant, and no concept of risk management. This was a big mistake, and although I closed many profitable trades using this method, my loses far exceeded my profits, and it wasn’t long before I had wiped out my account equity through risky emotional trading.

As I had no concept of risk management strategies, I used a ridiculous amount of leverage trading CFD’s and I engaged in dangerous ‘revenge’ trading after losing half of my account equity on a position that turned against me. This wouldn’t have been so bad if I had been using a strict trading plan to remove the emotion, but as it was I ended up moving my stop loss further and further away from my entry in the desperate hope the position would turn around and move back in my favour. I kept moving my stop loss until I was risking several times the value of the position, and it eventually took me out with over a 120% loss. To make matters even worse, the market then turned around and began moving back in my favour – you can imagine my complete and utter devastation.

This led to a bout of emotional revenge trading which saw me wipe out the rest of my account value, to the point where I didn’t even have enough left to open a new position.

I was beside myself, and it was one of the hardest things I’ve had to endure emotionally.

A lot of people make exactly the same mistake, and a lot of them make these mistakes using money borrowed from credit cards, friends or family – money that isn’t theirs, and which they certainly can’t afford to lose.

So, although I love trading, and have now come out the other side after immersing myself in learning and practice, I am acutely aware of the dangers and risks involved and it is for this reason that I want to help others avoid the same mistakes I made so they can get to a position of being consistently profitable much more quickly than I did, and with less heartache.

Trading – The Basics

Risk Management

Risk management is THE most important part of any trading plan; without it, it is extremely unlikely you will ever be consistently profitable. If you go on-line you’ll find tonnes of information about trading with people showing you 1000% gains per trade and other completely unrealistic nonsense. Be very careful what you believe and buy into when viewing material on-line, and if you see anyone pushing trading systems or indicators that purport to realise massive quick gains then avoid them at all costs.

Trading is NOT a get rich quick scheme – it takes time, practice and discipline to master, and the amount you are able to make/lose per trade is directly proportional to the value of your account equity.

You should always know exactly what price you are looking to enter a trade, and exactly what price level you are getting out of a trade – whether that’s being stopped out by your pre-determined stop loss because your prediction was wrong and the market moved against you, or being taken out at a pre-determined ‘take profit’ level.

There are three basic rules I work to when managing my risk in trading:

  1. Never risk more than 1% of your account equity per trade
  2. Always use a stop loss, and never move it once in the trade unless doing so is part of your pre-determined trading plan (for example, letting profits run and using a trailing stop loss behind significant candles or price structure)
  3. Do not enter a trade unless you have good reason to believe you can achieve at least a 1:1 risk/reward ratio on lower timeframe trades (5 minute charts), or a 1:3 risk/reward ratio on swing day trades on the higher timeframes (1 hour, 4 hour, and daily charts)

Analysis

Analysing the markets is so important before jumping into any positions – if you haven’t analysed the markets intelligently before opening a position, then your gambling and risking losing a serious amount of money based on a whim. There are two type of analysis when it comes to financial markets – technical analysis, and fundamental analysis.

Technical Analysis is the analysis is price action on the charts. It’s look at support and resistance zones created by historical price data, and the information conveyed through each individual candle stick. There are many technical analysis indicators out there, and certainly too many to go through here, but I would recommend ignoring most of them until you’ve mastered the basics and are working profitably consistently.

The technical indictors I use on a regular basis are as follows:

  1. Moving Averages – these are basically dynamic support and resistance zones that are based on information derived from a set period of historical price data. I use the 20, 50 and 200 period simple moving average, and the 8 period exponential moving average (I use different combinations of these depending on what strategy I’m using, but the 200SMA is one a use consistently across all markets as it’s one of the key indicators used by the large financial institutions)
  2. RSI – this is the relative strength index and put simply indicates buying or selling strength in a given market. Some people use this to trade trending channels, but I only use this as a rough reference and it doesn’t form a key part of my strategy – it’s more of an added confluence that would help confirm justification of a position along with other more potent reasons
  3. ATR – this is the Average True Range and is again based on a pre-defined period of historical price action. The ATR gives an indication of the level of volatility in a given market, and I use this to determine appropriate prices levels for my positions stop loses by keeping them wide of normal market volatility levels which can vary throughout the day
  4. Support & Resistance – this is probably the primary indicator I use when it comes to technical analysis, and are basically important prices levels determined by and derived from historical price data. They are basically levels where a given market has consistently struggled to break through, and so offer some indication of good levels to get in and out of trades. If I’m in a trade and it’s approaching a key daily or weekly support/resistance level, then I’ll be tightening my stops and closely managing the trade as there’s an increase probability of it turning around and moving against me when price action reaches these levels. Support and resistance is a great way to determine management levels for your trades and should never be ignored. Support is a price level where price action moves down to and then bounces upwards from, and resistance is a price level where price action moves up to and then bounces back down from
  5. Candle Sticks – candles tell us a lot about the sentiment in a given market by showing rejection from certain price levels and the shape of a fully formed candle can often be used a entry or exit signals for trades. There are many different names for different types of candle and candle stick formations, but the key ones I use on a consistent basis are the Pin Bar and Engulfing Candle

Fundamental analysis is a little more complex, and a little more involved if you’ve not done it before, and basically involves digging into the fundamental information about a stock or commodity to ascertain if there is a strong possibility of that stock going up or down in price. This often involves staying on top of financial and business news, and reading company reports and financial data. This is important and should not be ignored.

Most people will tend to favour one method of analysis over another, and that’s fine, but I would certainly recommend learning both as different strategies will require different skill sets and information sets. For example, when buying physical stock shares in companies my predominant method of analysis is through looking at fundamentals, but when day trading through CFD’s or Spread Bets I tend to favour technical analysis.

If I’m investing in company stock long term, then I want to be sure the company has strong financial data, low levels of debt in relation to it’s revenue, and healthy rising profits.

Your Trading Plan

Finally, it is of paramount importance that you have a written trading plan that you have back tested on the markets you wish to trade. Having a written plan helps to take the emotions out of trading, and gives you a strict set of rules to work to when opening, managing or closing positions in the markets.

A trading plan is just a set of rules that you stick to every time you enter into a trade, and that is based on the results of your back testing analysis through historical data. Always backtest your strategies using historical price data so you can form a meaningful and consistently profitable set of rules to work to when trading. I have several strategies that I’ve learned and devised that I’ve back tested over years of price data, and this is what gives me the confidence that overall my strategies are profitable. This is so important, as there will always be losing trades, and that’s fine so long as your using good risk management to cut your loses early and run your profits, and if you have faith in your plan being profitable over the long term because you’ve tested it on historical data.

Back testing might seem arduous and a lot of work, and although it can be a time consuming process, it’s well worth the time investment to ensure you’re operating a trading plan that is consistently profitable over a long period of time (years).

A trading plan is essential for removing the emotion from your trading – if you let your emotions tag along for the ride you WILL lose money. A good plan makes all your trading decisions for you, so you can’t get caught up in emotional trading when price action moves against you. Devise a good plan, and have the discipline to stick to it and you will be profitable over the long term.

Getting to grips with the basics I’ve outlined here will put you in a much stronger position than 90% of people who trade the financial markets, and although it takes time to learn and practice before refining your ability and techniques, mastering these basic concepts will start you on the path to consistently profitable trading.

If you’re interested in learning more, or in some private tuition on the basics of trading and understanding the markets, then get in touch with me at littlegreyjk@gmail.com for more information.

 

Advertisements

What Is Music?

“An art of sound in time that expresses ideas and emotions insignificant forms through the elements of rhythm, melody, harmony, and colour

– Dictionary Definition of ‘Music

Music, to me, is many different things.

My first experience of music were the songs I heard on the radio as a child, and even then I saw the power music seemed to have over the human psyche. Family car journeys that started out tense due to some sort of family disagreement (usually us kids arguing or otherwise acting up) would quickly evaporate into singing and smiles after a few of our favourite songs had blared out of the speakers. Music can change your mood in an instant, and that is a powerful attribute in it’s own right.

My next experience of music was way more intense.

I really started to ‘get’ music and start forming my own taste when I met my best friend in primary school. He was a huge influence on me musically, and I soaked up all the different rock ‘n’ roll bands he used to introduce me to playing his old style records on a secondhand turntable in his box room. Those were great times. Hearing all that rich music gave me a taste for the world that, until that point, had lay relatively hidden from me. All these different tastes, styles and influences – so much to take in!

It was Jake who piqued my interest in becoming a musician back when I met him in primary school, and I remember begging him for two years to let me join his band, but to no avail. Alas, they had all the members they needed and I was surplus to requirements (I couldn’t even play an instrument at the time, but I planned on figuring that out once I’d got a place in the band). That changed when we all went our separate ways to secondary school, which resulted in half of the band going to one school and the other half another. This was inconvenient for rehearsals, as these usually took place during school time, and so they band split. That was my opportunity! Hence, my first band was born in a dingy practise room in the depths of the Meole Brace School music department (Meole Brace Science College these days).

Writing and playing music in a band was a completely different experience to sitting in my mate’s room listening to an LP on a record player. The sheer energy and emotion behind the live music were the most intense and surreal feelings I had ever experienced at that point in my life. It was like the notes flowed through me, connecting me with my voice in a way I had never experienced before; I remember feeling almost naked when I used to sing, because writing lyrics was like taking my heart out of my chest and putting it on display for all to see. It was such as emotive experience, and so totally powerful.

Writing was something else again. The best way I have come up with to describe the writing process for me is that I don’t actually write the songs; they’re already written. All I have to do is enter my flow state and pull the different pieces from the ether before piecing them back together in the rehearsal room. Now, that may sound a little crazy to some of you if you’re never had this sort of experience, but this is the best way I can describe to you the way it feels for me. It was like channeling a special sort of energy that gave me access to a realm of limitless creativity, multiple perspectives and hyper-connectivity. It was, and still is for me, the purest form of flow I have ever experienced in my life. Standing on stage with a group of people you share that level of depth and connection with, pumping out your emotions in waves of sound that connect and morph in the air around you to create a magical charge of electrical energy in the room, is one of the most enchanting experiences I have had to this day. It is unlike any drug out there, or that I have experienced at least. That state takes you somewhere else – somewhere where ideas gain clarity and focus, connecting is all sorts of weird and wonderful ways, which allows you to see the world a little differently from others; it adds a special kind of perspective.

It’s so easy to get lost in that energy.

Music is also a time capsule. Who hasn’t been driving along when a song they haven’t heard in years randomly comes on the radio and before you know it you’re swept back 10 years into your past to an experience you remember like it was yesterday? You can smell the smells, hears the sounds and feel the sensations of your memory as if it were happening all over again. It can be a surreal experience, and I think it’s amazing how a simple song can trigger such a powerfully cognitive, and often physiological response as the nostalgia sweeps over you.

Songs that hold deep meaning for us at any given time have amazing power to lock potent experiences into your memory for later recall; the song the acting as the trigger at some point in the future.

Music is also, at it’s most basic level, sound. This may sound obvious, but bear with me.

With each passing day, scientists are discovering more and more about the power of sound and it’s potential effect on matter. We now know that we can use certain frequencies as destructive weapons by focusing beams of sound energy, it can be used to levitate physical objects and for brain wave entrainment through the use of Binaural Beats. Music and sound in general literally affect the oscillations of brain waves, so can be a useful tool in changing how we feel by having a direct physiological effect on our bodies. This is useful as a tool to help put you in a resourceful state and empower you with feelings of confidence so you can face the challenges of your day. It can also help you wind down after a long or stressful day at work – there is a piece of music for every state imaginable.

I had a laminated piece of card in the room for years when I was growing up that read ‘Music is medicine, it can cure anything’. Now, saying that it can cure anything is quite a lofty claim, as I’m sure you’ll agree, but it has certainly helped me through some pretty dismal times in my life, whilst also providing the soundtrack to my ebb and flow of my myriad experiences over the years. To this day there are songs that make the hairs stand up on the back of my neck when they come on the radio, and I have never lost my ability to tap into that pure state of flow that comes with writing and performing music live.

Music can be all things, and it can be whatever you need or want it to be. It can be hard or soft, fast or slow – these days we are lucky enough to access via the internet to pretty much anything we want, and music is a tool you just can’t afford to not have accompany you through life. It has powerful abilities as a state changer, and so is useful for this purpose alone.

For me, it is a form of expression so deep and powerful that I feel I am ripping open my chest and baring my soul to the world when I write and perform. It is the purest form of communication I know of, and one that transcends geography, culture and differences. It is form of communication that transcends language, communicating thoughts and feelings on so many different levels that it can only be felt and never described. Music is a vehicle for unity, understanding and connectivity. If you read between the lines, you will see an underlying emotional message lurking between the rhythm and rhyme – a message so potent that words are powerless to describe it. It is a vicarious rollercoaster ride of emotional experience that can make you laugh or cry.

Whether it’s uppers or downers you’re looking for, music has a pill for you…