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.

 

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Understanding The Stock Market & Trading

The Stock Market and financial trading is probably one of the most misunderstood mechanisms on the planet. Anyone you ask will have an opinion about it, but very few actually understand what it is or how it all works.

This is a real shame, because the stock market and the various trading instruments that exist today have lowered the barrier of entry to this field monumentally in recent years, and the stock market is now accessible to pretty much everyone.

There are lots of misconceptions about the stock market, and the people who use it as a trading tool, and so it’s important that we understand the basics to be able to dispel the myths and sort the good advice from the bullshit.

So, what is the stock market?

Well, the stock market is basically a place where people trade emotions. I say that, because although the nuts and bolts of the stock market are the stocks, commodities and currency markets on one side, and the myriad of investors, retail traders and financial institutions on the other, the values of those stocks are largely based upon people’s collective emotions at any given moment. This is what you’re seeing when you seeing price action moving on the candle charts; it’s a visual representation of the mean average of the presiding emotional sentiment in the market at any given time.

So the components of the stock market are simply:

  1. Company Stocks/Shares (Apple, Facebook, Google etc.)
  2. Commodities (Gold, Silver, Platinum, Oil etc.)
  3. Currencies (FOREX – Foreign Exchange)
  4. Indices (these are collections of companies and so their value is the mean average of the value of all the companies within the index – an example would be the FTSE100, which is comprised of 100 of the top blue chip companies in the UK at any given point in time)
  5. ETF’s (Exchange Traded Funds – these are fundsĀ that are a marketable security tracking an index, a commodity, bonds or a basket of assets like an index fund)
  6. Investors (companies and individuals of various sophistications buying and selling stocks and shares on the market)
  7. Financial Institutions (banks, funds, brokers, and traders buying and selling on the stock market)
  8. Retail Traders (everyone else trading stocks and shares on the market)

Looks a little complicated doesn’t it? Well, it’s really not.

In order to simplify, look at it this way – it is the same as buying and selling food at a street market where prices fluctuate over time, only in the stock market this happens at a much faster rate.

For those who take the time and make the effort to understand the mechanics of it, there is the potential for rich rewards where every day your money works for you, rather than you working for money. Financial freedom is attainable for each and every one of us, all we have to do is take the time, and make the effort, to learn the rules of the game.

It doesn’t matter if the stock market is in the middle of a strong bullish rally, or a crashing bearish descent – when you know the rules, you can make money either way.

Ever since I started learning about trading the stock market and investing I was confused as to why more people didn’t know about it, and why more people weren’t doing it. It seems to me like this is something that they should be teaching our kids in school, as it stands to return significantly more handsomely than any bank on your pot of savings – if you know what you’re doing.

And it’s really not that hard; the rules are simple – it’s having the discipline to stick to them rigidly that is the challenge for most.

I should tell you now that 90% of people who try to learn how to trade end up failing and wiping out their accounts, and this is somewhat responsible for why it has a bad name. I cannot stress enough that there is no such things as a risky trade or a risky investment – only risky traders and risky investors. Those people who don’t have the education, the cohesive plan or the experience in the markets to have the first clue about what their doing, and who are basically gambling their money on the stock market. This is why 90% of traders fail – it’s a lack of knowledge and understanding of the rules of the game.

Trading Instruments

There are various different instruments that are available to retail traders these days, all with slightly different mechanisms but all based around the same set of skills. If you can trade the stock market, then your skills should be transferable across spread betting, trading CFD’s and investing in physical stocks and shares.

The main different instruments are:

  1. CFD’s (Contracts for Difference) – these pretty much do what they say on the tin, and is the main instrument I am trading at the moment due to the versatility of the social trading platforms available. When you trade on platforms that operate on a contract for difference basis you do not own any of the underlying asset, and so do not benefit from any dividend payments. All you are doing when you open a position is taking out a contract with your chosen broker agreeing that if the price of the asset increases or decreases from a fixed entry price then either you pay your broker a set amount per pip of price movement (if the price moves against direction of your position – up or down), or your broker pays you. When you close the position, you close the contract and either ending up taking profits (if you guessed the direction of the market correctly) or closing out for a loss if you guessed incorrectly. One of the big advantages to trading instruments likes CFD’s and Spread Betting is that you can use leverage to increase your asset holding without needing to invest or tie up the total value of the asset invested. However, be warned, whereas this drastically increases your ability to make significant profits, it also drastically increases the likelihood of having a catastrophic loss that wipes out your account – proper risk management should be observed at all times when trading
  2. Spread Betting – this works in exactly the same way as CFD’s, and you’re trading the same stocks and commodities on the same charts, only the profits you make trading through this instrument are completely tax free. This is because it’s called Spread ‘Betting’ and so because it’s classed as ‘gambling’, any profits are not currently subject to UK tax. This makes it an excellent instrument for generating a residual or passive income. Both Spread Betting and CFD trading allows for very easy entry and exit from trades, powerful leverage if used correctly and guaranteed stop losses and take profits for protecting your trading equity. They both also allow for you to enter positions to profit when the markets are both falling (bearish) and rising (bullish), by either going short (selling) or long (buying)
  3. Investing in actual Stocks and Shares – this is where you actually own the underlying asset, whether that’s a share in a company or some sort of ETF. This process is subject to higher broker fees when buying and selling, and so is better suited for longer term swing trades or long term investments. This method only allows you to profit when the asset increases in value or through the repeat dividend payments – if you own shares in companies that pay dividends then you will generate a regular passive income that can be used to reinvest in more shares and add to the compounding of your wealth. The more shares you own, the more dividend you get paid, and so the compounded growth is never ending and grow like a snowball rolling down the Alps

Fundamental or Technical?

There are two different techniques when it comes to trading – fundamental analysis, and technical analysis.

Fundamental Analysis is where you look at the financial and economic data for a given asset and make your trading and investment decisions based on the results of what you find in that data. This could be company financial reports, earnings reports, or economic data such as inflation rates or political announcements. This would be the best method for discerning quality assets for long term investments, as it’s important to be able to have confidence in an investment over time by confirming that the asset in which you’re investing your hard earned money is financially sound.

Technical Analysis is where you look at the price action data on the charts. There are several different types of charts and many different methods of technical analysis, but you only need to master a few to be a successful trader – even mastering one method will return profitable results if you stick to the trading plan without deviation. This looks at historical price data on charts relating to different time frames from 1 minute up to weeks and months of price data per candle, and provides insightful information about likely areas, or zones, where the markets are likely to react from and change direction. This is where technical analysis provides numerous trading opportunities – in recognising patterns, and in understanding how the mechanics of the markets are structured.

Ultimately, you’ll probably end up favouring one over the other and this will govern how you build and execute your trading plan.

Trading Psychology

“Success is 20% mechanics, 80% psychology”

– Tony Robbins

Trading psychology is without a doubt the hardest part of trading to master. Never mind all the charts, terminology and financial data – mastering your mind, your discipline and your emotions trumps them all.

The effect a losing trade can have on our psychology can be profound, and for most is what leads to emotional trading that generates massive losses and even wipes out people’s entire trading accounts. Emotional trading is a big NO, and this is the single most important reason for having and using a detailed trading plan. Having a written plan that details exactly what your methods are, and specifies your researched and back tested criteria for entering and exiting trade positions, will remove the need to make any decisions when you have money on the line. It’s when you have money riding on an open position that your primal croc brain starts to fuck with you and allowing this to take over your thinking when trading is the beginning of the end for most traders.

You have to learn to be your own trading coach and mentor – or go out and find someone who can fulfil that role for you. The best resource I’ve come across so far that really helped me gain control of my psychology when trading and which has helped me to remove all emotional trading from my trades was the following book by Brett N. Steenbarger:

This book gave me all the tools I needed to understand the inner workings of my own psychology when it came to trading, and indeed gave me skills which transferred over into others areas of my life such as sport and business. A really excellent book, and highly recommend – in fact, it’s a must if you’re thinking of embarking on the journey of learning to become a financial trader. Without it, the risk of your emotions taking control and devastating your trading account is all too real.

The stock market, by it’s very nature, goes up and down in cycles. As I hope I’ve shown in this short blog, there are the vehicles available today that allow everyone with access to a computer, smart phone or tablet and an internet connection to trade on the financial markets. Most platforms come with free virtual trading accounts that allow you to trade the markets in the first instance with fake money. This provides the opportunity for gaining valuable experience in the stock market, watching and learning how it moves, and means you can try out new techniques, systems or adjustments to your trading plan without putting any of your hard earned capital at risk. Once you see that you are consistently generating profits over a period of several months, you can then begin trading with real equity with some degree of confidence that you know what you’re doing and have a trading system that is profitable when followed with discipline.

Everyone has the ability to be financially free by taking the time to learn this skill, and doing so is going to not only put your future in your hands, but also has the potential to return significantly on capital invested – more so than any bank or other financial institution is going to give you that’s for sure.

From Beginner to Trader

I will be running a ‘From Beginner to Trader’ course around the Oswestry/Welshpool area very soon for anyone who is interested in learning about how to trade the stock market using the instruments I’ve described in this blog. The course will take a complete beginner who knows nothing about the stock market and trading through learning the skills needed to become a profitable trader. Course material will be provided in a live training environment, and you will come away from the training session with:

  1. A solid understanding of the mechanics of how the stock market and it’s various instruments work and move
  2. A solid understand of both fundamental and technical analysis, and strategies for utilising both methods in your trading
  3. A tool box full of tried and tested technical indicators for providing high probability entry and exit points for your trades
  4. A trading plan for intra-day trading on the 5-minute time frame
  5. A trading plan for swing-day trading on the higher time frames (4 hour, daily, weekly)
  6. A trading plan for pattern trading according to price action and technical indicators, as well as a thorough understanding of what key support and resistance levels are and how to define them on your charts
  7. How to buy and sell assets tax free – both through leveraged instruments and through physical stocks and shares
  8. A road map for finding quality shares for longer term investment
  9. An understanding of the emerging crypto-currency markets and how to maximise trading profits trading these alternative currencies
  10. A risk management strategy that will stop you blowing your account and that will keep your trading equity protected by minimising your losses and maximising your profits
  11. An understanding of the importance of psychology in trading, and techniques for mastering your emotions when engaged in live trades

Financial freedom is the ultimate goal – to every day have the choice of what you do, where you do it, and who you do it with. No constraints, no limits, no worries.

The beautiful thing about that? That the more people there are in the World who have that level of freedom and choice in their lives, the more people there will be in the World who have the desire and capability to help everyone else up to that level.

I’d love to see you on my ‘From Beginner to Trader’ trading course as I know it will change the way you think about money, and it has the potential to change your life if you implement the lessons you will learn in the course. Please register your interest by completing the contact form below, and I’ll send you an e-mail with all the details including how to register: