Many enter the world of trading expecting to make a profit from day one. Just think how long it takes to learn to become a professional in any career: generally years, not overnight! All that training and practising to achieve the desired level of proficiency.
Our Trading for Beginners Guide provides insight into what it really takes to become a trader and the different types of assistance available to help you reach your goal.
New traders rarely understand the need for a trading plan, let alone develop one, which is essential to longevity in trading.
Trading is such a personal journey that is leads to a different road for everyone. Your personality will have such an impact – passive, impatient, risk appetite and much more. A key element here is to try all the various asset classes (in demo) to identify which suits your character best.
Contents
- Decide on your career stop loss
- Market Terminology
- How do I start?
- What do I need to know?
- How much free time do I have, and when?
- What are my interests?
- What type of trader will I become?
- The need to practice
- How to build a trading plan and why
- Which broker should I use?
- Which trading system should I use?
- When do I know I am ready?
#1 Trading for Beginners: Decide on your career stop loss
Define how much money you want to allocate to your trading at the outset
It is so easy to open an account, place some funds into it and start trading. The question is, will you be any good!
You must treat trading as you would any other business venture and decide the maximum you will you invest in that business. The difference is this time the business is you!
This is extremely important. It is so easy to place some funds with a broker. If you lose some of your funds, the broker will contact you to top up your account. This could happen time and again and you can keep topping up your account without realising how much you have actually used! When you realise your savings have disappeared, its too late.
A useful tip is to create an Excel sheet or somewhere else where you can make a note of your deposits. The best method is to begin with the maximum and then deduct deposit values as they are made. If the balance touches zero, then STOP trading. It doesn’t mean that trading is not for you, just not right now. Return to a demo account for at least 6 months and practice or have some professional training. A professional may be able to identify what you are doing wrong and provide some guidance to help you reach your goal.
#2 Trading for Beginners: Market Terminology
Understand the jargon used in the markets and by traders
There is a whole new language to learn when it comes to the markets and trading.
It is important to understand this jargon as it will help you decipher reports, plus trader and central bankers’ comments.
Over time as you become familiar with the language, you will be able to understand the reports and then be able to filter out what is important and what is not! There is so much information available from a huge range of sources and it can lead to information overload, which not only consumes a substantial amount of your time but can easily confuse you too!
Free Resources
#3 Trading for Beginners: How do I start?
Read books, watch videos, take a course!
The first thing is to consider why you want to trade? Is it just the money or because you want to become a successful trader?
It is so easy to open an account with a broker and just start clicking buttons without knowing what you are doing, and it is possible to have some success. Unfortunately, it will be short lived as the law of averages catches up with you and goodbye deposit!
Every career requires training and trading is no different. The only real difference is nobody is going to let you operate on a patient, run into a burning building or defend someone in court without qualifications, which take years to attain. It is not that trading should be compared to such careers; however, it is to add perspective to the challenge that lies ahead! Just because someone will let you do it from the very first day…it doesn’t make it right!
#4 Trading for Beginners: What do I need to know
Fundamentals (macro), technical analysis, risk management, trading techniques, trading psychology
To begin trading, not very much. However, to become consistently profitable, a lot!
The more knowledge you obtain the better the chance of becoming a trader. This includes the fundamentals that determine price and trend along with technical analysis to assist with the timing of entering and exiting a position.
It is essential to manage risk to protect against high losses and to protect profits. Trading techniques which allow you to adapt to a variety of market conditions and trading psychology, controlling your emotions during trading and then practice, practice and more practice.
Connectivity is a priority if you are trading electronically. However, it is important to have not just reliable fast internet but also a reliable computer.
Resources
#5 Trading for Beginners: How much free time do I have, and when?
You’ll need to find a trading strategy that works around you
Trading requires extensive practice and if you have the time and resources a course to speed up the learning process.
There are many courses available, many focus solely on forex but others cover all asset classes which is useful to find out which suits you the best. This is essential for product selection and to create your trading plan (your set of rules) as this will assist in developing consistency over time.
Whether you decide on a course to build your knowledge and trading skills first will not alter the fact you will need to put in many hours of screen-time (practice) to hone those trading skills and understand market psychology as well as trading psychology.
If you are fortunate to still have a job, then your trading will be dictated by the free time you have available to practice. Fortunately, the markets are open 23-hours per day or some 24/7. Practicing at different times of the day or night will help you find the best time period for you.
The more of your free time you commit to practicing the quicker you will grasp trading, risk management, analysing markets, controlling your emotions. Trading also helps you understand yourself better too!
#6 Trading for Beginners: What are my interests?
Play to your strengths, trade the instruments that excite you
Apart from your character helping to mould you as a trader, your educations, hobbies, current career, heritage can also play a part in the asset class you finally connect to and focus on.
Other key considerations will be the pace of market you are most comfortable with, slow, medium, or fast and the appetite you have for risk.
There is a good selection of asset classes and products to choose from. There is the obvious one which most traders, especially retail traders elect to trade and that is forex. The market is liquid, open 24-hours 5-days per week (it is even possible to trade weekends through one platform (institutions), however, it is slow to medium paced and therefore maybe not for you.
Equities or equity indices are faster paced and can be very volatile at times. Fixed income and interest rates are more specialised and perhaps something to consider after gaining some experience.
It is useful to have an understanding of macroeconomics and how these markets operate.
Commodities are more complex with a different set of fundamentals impacting them, such as the weather, supply issue and so much more, which does make them interesting. You can choose from a variety of energy products, metals, agricultural products, softs, even livestock. (here you could list gold, crude oil, wheat, coffee, cattle).
Whichever asset class you decide upon, it is useful to understand the fundamentals that impact them as this generally dictates the trend and technical analysis is useful as a visual aid and to assist with timing entries and exits.
It will take many hours of practice testing the various asset classes and products to ensure you select the correct one.
#7 Trading for Beginners: What type of trader will I become?
How my personality will influence my trading?
This will depend a lot on your character. Are you passive, aggressive, patient or impatient and your risk appetite?
If you are patient, you will gain better entries as you will wait for the market to come to your level rather than being impulsive and rushing into trades. This will reward you with more high probability trades and generally if you are patient you will also be passive.
Risk appetite is based on how you approach the risk you will accept in a trade, If you are cautious you will wait for the high probability trades, however, it may also lead you to take profits too early and possibly have your stop loss close to your entry price.
This not a bad thing but may limit your progress in the early stages until you become more understanding and comfortable with risk. Those that are willing to risk more will have more losses and experience more of an emotional rollercoaster during their trading.
Unfortunately, as you cannot change your character you must just adapt as best you can to create your trading style and your trading plan.
These traits may also influence whether you become a scalper, swing trader, day trader, or investor. Something that will influence this will be the time you have to trade. Is this your career or to supplement your existing income and do you have all day to trade or just a few hours!
#8 Trading for Beginners: The need to practice
Perfect your trading skills on a demo account
If you wanted a career as a doctor or engineer or any other profession, would you expect to gain the experience required overnight? No. It is the same with trading. You must go through your training and in this instance, it is spending time on a simulator, practising, and honing your trading skills.
Learning to trade is straightforward. You may elect to seek professional guidance and training to stop you making mistakes and accelerate the learning process or you may decide to watch hours of YouTube videos which could work for or against you. Every trader has their own unique style and watching a variety of traders may actually confuse you more than help! With videos there is no feedback guidance. Watching a professional doesn’t instantly mean you can do it yourself.
The other option is to go it alone and just keep practising until you feel you have the basic skills. Bear in mind the basic skills still won’t give you enough experience to risk your hard-earned money, so practice more.
Set some achievable goals to help you assess your performance and consider the psychological side to trading – are you able to keep your emotions in check?
Practice is unlikely to make perfect; however, it will help you understand how the markets operate, assist in building your trading style and plan in order to prepare for the day you will trade and risk your capital.
Resources
#9 Trading for Beginners: How to build a trading plan and why
A trading plan is simply a set of rules to help try and keep you safe
There are two parts to a trading plan, the financial rules and the second which is the criteria required for you to enter or exit a trade.
The financial rules should include your career stop, which is the maximum you will invest in yourself to become a trader (the same as any potential business) and once set this should not be broken. Create an Excel sheet and begin that figure, then deduct the deposit you send to the broker to open your account and then deduct any further payments you need to make to top the account up. If it reaches zero, STOP! Go back on a simulator for at least 6 months or until you can produce consistent results.
Based on your capital deposit with the broker you then need to decide on the maximum you are prepared to risk per week or per day, depending on how frequently you will trade. Then from that latter figure you need to divide it by how many trades you expect to execute per day. This is how much you should risk per trade.
Other rules include no revenge trading – refrain from impulsive decisions.
The second part is your trading. What does the market have to do for you to enter a trade, and exit a trade? This requires you to decide on the product you will trade and develop your trading technique and strategy. Plus consider your risk-reward.
Possibly create a daily routine too as all of this will assist in creating consistency, as long as your trading plan is robust.
#10 Trading for Beginners: Which broker should I use?
Pick a regulated broker that offers the markets and services you need
When it comes to selecting a broker the first thing to consider is what instruments you will be trading, CFDs, or futures & options. This is important as most brokers only offer access one or the other.
CFDs are contracts for difference that allow traders and investors to trade the price movement of a futures contract, however, it is important to acknowledge they are not a futures contract, simply closely mirroring the futures price activity. Beware if you choose this route and are offered leverage!
Futures & Options are traded on traditional exchanges and are very transparent and liquid. When you trade on these markets your counterparty is another a trader and not the company providing the prices. There is a plethora of contracts to select from for trading and most enjoy high liquidity and these contracts are standardised with set value and expiration.
#11 Trading for Beginners: Which trading system should I use?
Do you need a powerful platform with loads of functionality or something simpler?
Choosing the right trading system will depend on your trading goals and your decision to trade with Contracts for Difference or with futures and options.
This extremely important as it so easy to place some funds with a broker and then if you lose some of the funds the broker contacts you to top up your account. This could happen time and again and you keep topping the account up without realising how much you have actually used! When you finally notice is when you realise your savings have disappeared and then its too late.
Most retail use MT4, although there are other system available. If you elect to trade futures and options, it will depend which systems your broker supports but they usually have at least two or three.
When do I know I am ready?
Be honest with yourself, this is not the time to charge in
This will be different to when you think you are ready! A few winning days on a trading simulator tends to convince inexperienced traders they are ready to trade live, but this is rarely the case.
As much as you try and convince yourself you are treating the demo seriously, which you may be, it will not prepare you for trading live and risking your capital. The main difference is there are no consequences on a demo. If you lose money on a simulator you do not have to pay it!
Anyone can be lucky and have the odd, good day, unfortunately trading requires consistency if you intend to make a career of it or as a second income. Therefore, you need to create your trading plan, understand risk-reward, and hone your trading skills BEFORE risking your hard-earned capital!
You should set out goals to reach that will confirm you are consistently producing revenue…and do not forget to consider any costs. A suggestion is to set a minimum number of winning days in a certain time period and of course, there must be a reasonable overall profit too. Ultimately, only you will know when you think you are ready to make that first trade!
