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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Financial Wealth: What, How & Why

On the back of Tony Robbins releasing his latest book Unshakeable: Your Guide to Financial Freedom, I want to talk a bit about how my philosophy on financial wealth has evolved over the last couple of years and my current view on why building personal wealth is so important.

We’re all aware (or at least should be) that there are many definitions of what wealth means to a person. There are many extremely wealthy people in the World who have very limited resources – for example, people who are blessed with the unwavering love of a family and support network yet barely scrape enough money together to pay the household bills each month. These people are emotionally wealthy, whilst being financially poor.

Accepting this, today’s focus is going to be around describing what financial wealth is, how it is generated and why it is important to build personal wealth in the first place.

First, some background.

Over the last 10 years I have managed to do a complete 360 on what money and financial wealth means to me, and how I leverage it in my life. When I was in my early 20’s I was playing in a rock band and living for the many and varied social experiences that provided for me. I was also hanging around with people who called themselves socialists, and who generally had a very dim view on money and the effect it has on people – in their eyes, and mine at the time, money was the source of all evil.

My view today couldn’t be more different and I wrote a full post describing my current view on money explaining how it is one of the most ingenious systems we have devised, with it having the power to harness the resources and will of an entire global species – it is the ultimate tool for progress and provides and incredible amount of leverage to get things done. What let’s it down is the people behind it – not the system itself. You can read more of my thoughts on the subject HERE.

Money often gets a bad name because of the unethical and dishonest intentions driving it. After all, it’s like any other tool – if it’s put in the wrong hands it can be extremely destructive. With a system or tool that possesses the insane amount of leverage that money commands, the downside has the potential to be as powerful as the upside. This is why, as we all know, it is so important to ensure the powerful systems we design are used correctly, and with the best of intentions. A bullet in a gun can either be used to kill food to feed your starving family, or it can be used to murder them – same tool, same level power/consequence, completely different outcome as a result of the different intentions driving it.

I hope you can see how ridiculous it is to blame money – or any other tool for that matter – for our short comings. It’s about time we take responsibility for ourselves, so we can harness the full potential power of the systems we’ve designed to effect massive evolution on our planet before it’s too late.

So, what is financial wealth?

Simply put, healthy financial wealth is when you stop working for money and start making your money work for you. Most of us are stuck in jobs that leave us feeling overworked, under-appreciated and under-paid. We have locked ourselves into this limiting pattern where we have convinced ourselves that our only options for increasing our personal wealth is to work harder, more often and for longer. Is it any wonder most people just accept their situation for what it is and make do? It doesn’t make sense to do more of what you hate to realise a relatively insignificant rise in personal income whilst in turn leaving you with less free personal time to enjoy the additional income. Besides, even earning hundreds of thousands per year through employed income would mean paying significant sums of money over to the tax man and you would still have to put most of that away to be able to have any hope of saving enough for retirement.

Financial wealth is a change in mindset from exchanging your time for money, to making your money generate income you can live off so you can focus your time and energy on leading a fulfilling life. The key to financial wealth is working less, not more!

Remember what ‘job’ stands for – ‘Just Over Broke’

Now I’m not saying you should go out and quit your job tomorrow, and neither am I suggesting that this path is any easier to walk than the job route, but the journey is rich with fulfilling experiences and can be extremely rewarding when you know what the rules are and how to play the game. For most people who don’t have rich parents or a nest egg of savings they can call on, a job will be necessary to fund the first few years of the wealth building process but it should only be seen as one of the many stepping stones to the attainment of financial freedom and as such, only temporary.

How can the average person achieve financial wealth?

Financial wealth, and ultimately freedom, is something that is an inalienable human right and that can be achieved by anyone in the western world who makes the effort to take the steps required of them. This involves learning the rules of the game, increasing your financial literacy and intelligence, and putting what you’ve learned into action.

Remember, knowledge is only potential power – real power is in putting that knowledge into action in your life.

In the beginning, I recommend reading a lot of books, watching a lot of on-line content and talking to knowledgable people who are already executing their plan to realise their own financial freedom (or even better, those who have already got there). I didn’t say it would be easy, and I certainly didn’t say it wasn’t going to take hard work and dedication – suck it up; if you want the life you’re dreaming of then you’re going to have to damn well work for it. This, and this reason alone, is why most people will never achieve financial freedom – they are lazy, comfortable and apathetic. These are the people who focus on wealth for the wrong reasons and who have no purpose behind their actions, as we shall discuss in more detail in the ‘why’ section that follows.

Building wealth starts with saving some money; remember, money is a tool with the power of leverage and as you will see, utilising as much leverage as your personal risk/reward plan allows is key to expediting the process of wealth building. The best way to save money is to open a separate account where it can be stored safely without getting mixed up with your personal family finances. It really doesn’t matter how much you save per week or month, just that you save something. Everyone can save something – even if that’s 50p a week in a jar on your bedroom windowsill. If you never start – even with saving relatively small amounts – you’re guaranteed to fail. By starting with even the smallest contribution to your fund, you are growing your financial freedom fund every day/week/month/year and as it starts to grow in value, so does the power of leverage you are able to command.

Once you have a pot of money – whether it’s a few hundred or a few thousand – you need to start thinking about shifting your focus on how you can start making that pot of money generate income for you. There are many ways to do this, and my top five are listed below:

  1. Investing in the stock market – Tony Robbins recommends a well balanced portfolio of index funds to keep fees and costs to a minimum and to achieve market based returns
  2. Investing in commodities like Gold and Silver – commodities like gold and silver should be, in my opinion, part of any sensible investors portfolio for the simple reason that as the stock market goes down, commodity prices rise and vice versa providing a level of security against such bearish markets
  3. Investing in property for capital gains – there are two property investment strategies, and this is one of them; it should be noted that there is no guarantee that property prices will continue to rise, though overall they do tend to follow a similar sort of pattern to the stock market – although it does regularly crash, the floor it hits is usually higher than the floor it hit during the previous bearish period and it usually returns to strength hitting new all time highs. This being the case, and as with stock market holdings, investors should be prepared to hold their investment interests for long periods in order to realise the best returns. Be warned though that profits from gains will be subject to CGT and this should be accounted for when calculating your potential returns
  4. Investment in property for cash flow – this is my preferred property investment strategy and is not concerned with repaying the principal loan of a given property resulting in an increased cash flow from rent due to utilising the leverage of interest only mortgage repayments. The amount of leverage it is possible to utilise in these types of property investments can be insane when structured correctly, and can be a very lucrative source of increased personal cash flow. Buy to let mortgages are assessed on the ability of the property in question to generate roughly 1.25x the monthly mortgage repayment, and so in theory there is no limit to how many properties you can structure under this arrangement within reason and assuming you manage your portfolio effectively. A small portfolio of 10 or so rental properties realising a couple of hundred pounds in additional cashflow each month is going to get you to a point whereby your living expenses are covered by your passive income relatively quickly and is not subject to the same volatility as the stock market or ‘flipping’ properties – in fact, in difficult financial times, rental demand tends to increase and so rental property investments are extremely good at weathering the storm of a financial crisis… so long as the bank doesn’t pull the rug out from underneath you
  5. Start a business – this one by far is going to take the most amount of time and effort and so should not be considered lightly. On average 400,000 businesses are incorporated each year in the UK alone, and of these 20% will no longer be around after 1 year. 50% will have failed within the first 3 years. Again, the reason behind this shocking level of failure is that the people starting these businesses often don’t do what is required to really set themselves up for success. They don’t embark on the journey of learning the new skills required to set themselves up for success, and thus the pitfalls of business eventually catch them out along the way and force the closure of their baby. Owning your own business can be an excellent investment if you put the effort into it, as you are investing in something in which you have a legal insiders view that you have significant control over – there is no such thing as a risky investment, just risky uneducated investors. Whether you build your business to provide regular income, to solve a need (such as a property management business to manage your investment property portfolio) or to eventually sell for billions it can be a fantastic way to build long term wealth

Anyone can incorporate their own business, save a few quid a week towards their wealth building fund and invest their money in accessible ways that will begin the process of making their money work for them rather than the other way around. All it takes is the desire for something better, and the willingness to learn.

But, why?

Ah, the million dollar question.

I’m sure most of you are expecting the following answer at this point; you should focus on building personal wealth so you can be comfortable in life, provide for your family, have a life rich with experiences of all shapes and sizes and not have to waste your time going to work every day for a boss you despise.

Well, yes but that answer only focuses on the effect increased personal financial wealth will have on you and your immediate family. Although these are excellent reasons which should not be discounted, and that I’m sure highly motivating, I have a much better one.

We all have an obligation to build personal financial wealth to the point where we all have financial freedom not because of what that freedom means for us but because of what that freedom means for what we are then able to give back to the World around us.

Money is a tool which provides a powerful leverage over the World we live in. We have a duty to ensure that there are more good people wielding that kind of leverage than bad people in the World, and that we use the leverage we hold power over to consciously go out and make a difference in people’s lives. I have met so many millionaires over the last few months and there are two things that consistently amaze me – how much of a difference they are personally making to the underprivileged and under resourced people in the World, and how little we hear about it in the media.

If it bleeds, it leads. Rich people building schools and wells in Africa who bypass the system of charity organisations because they want to make sure 100% of their money goes to the cause as opposed to being swallowed up by the operating costs of some not-for-profit doesn’t sell newspapers or hook people into news shows. It’s a sad fact, but a fact nonetheless. These people are not interested in fame or fortune – they are interested in, and solely focused on using their power of leverage to change the World for the better.

This is why YOU have a duty to become financially free and to build your own personal wealth. The Governments of the World are part of the problem, on average only 8-10% of the money you donate to charity actually makes it’s way to the front line, and most people are too lazy and comfortable in their sheltered existence to give a shit. If you truly want to see a better World then you have an obligation to get up off your arse and start being the change you want to see – if you want to see a World filled with people who are financially free, living their dreams and furthering the evolution of the human species, then step up – change starts at home. Lead by example, show others the limits they’ve previously imposed on themselves are a choice, and light the way by using the leverage you empower yourself with to help build a World where everyone is afforded a basic standard of living.

If that’s not something worth building wealth for, then I don’t know what is. The personal benefits are just a pleasant side effect.

Thank you for reading, and I hope my words have helped you think about wealth and money in a slightly different way. This can be a particularly emotive topic for some people, and I would like to encourage active discussion in the comments. I’d love to hear your thoughts, and if this has changed how you think about money in your life I’d love to hear how.

If you would like to discuss any of the subjects in today’s post in more depth, or discuss strategies you can implement in your life to set yourself up for success, please feel free to drop me an e-mail at littlegreyjk@gmail.com – I am in the process of launching a coaching service around business, health and personal development and would love to hear from you.

Have a fantastic day!