Blog: Trading Tips

This is the last video in this tutorial series, which means, it’s now time to put into practice what we’ve learned so far.

So, let’s explore how to place your first trade and the different ways you can do it. This is an order ticket. When you look at the order ticket, you’ll usually see two prices: the bid price on the left and the ask price on the right. The ask price is usually higher than the bid price, and the difference between the two prices is known as the spread. If you want to buy a stock, you’ll have to buy at the ask price, and if you want to sell, you’ll have to sell at the bid price.

There are four main types of orders which traders use to buy and sell stocks in the market.

The first is the market order, commonly referred to by traders as hitting the market. This means that you buy or sell immediately using the bid ask price that is currently offered by the market.

The next order is the limit order, which means you queue to buy at a better price or queue to sell at a better price. For example, if you think that this stock is going to drop to $3.70, then instead of buying at the current ask price of $3.80, you can place a limit buy order at $3.70, which will kick in once the stock reaches that price and make the purchase.

Next up, we have the stop order, which as its name suggests, is useful for placing your stop-loss and very important for applying the 2% money management rule. For example, if you have bought this stock at $3.80 and you want to cut your losses once the stock drops below $3.70. You can place a stop sell order at $3.70, which will kick in once the stock reaches that price and sell off the stock.

Lastly, we have the OCO, or one cancels the other bracket order, which is basically a combination of one limit order and one stop order, which will cancel the other when either is triggered. This is commonly used when traders place their stop-loss and target profit.

These order types might seem confusing at first, but once you’ve placed a few trades, it’ll soon become second nature, and you’ll stick to the order types that suit your trading style and gives you the best results. That’s it!

Congratulations on completing the video tutorial series. We hope you’ve had an enjoyable and enlightening journey into the world of trading, but remember this is just the first step to becoming a successful trader. We encourage you to read up more, attend some workshops and most importantly, put what you have learned into practice. Good luck!

Spencer is an avid globetrotter who achieved financial freedom in his 20s, while trading & teaching across 70+ countries. As a former professional trader in private equity and proprietary funds, he has over 15 years of market experience, and has been featured on more than 20 occasions in the media.

The 2% Money Management Rule

We all know that the goal of trading is to make money and so far we’ve learned that as long as you have an edge in the market you will be profitable in the long run.

So the next question is how do you maximize your profitability without blowing up your account?

The answer lies in the 2% money management rule.

This rule states that you should never commit more than 2% of your available capital on a single trade.

Let’s say you have $10,000 to bet and you’re considering a particular trade with a hit rate of 60%.

How much should you bet?

If you bet the whole $10,000, you have a 60% chance of doubling your money

But you also have a 40% chance of losing everything.

That’s pretty exciting if you’re a gambler but not ideal if you want to remain profitable in the long run.

Let’s say you split your $10,000 into two bets of $5,000 each your probability of losing two bets in a row is only 16 percent or 40% x 40% which means your chances of losing everything are much less.

Sounds good?

Well if you took it one step further and split your $10,000 into ten bets of $1,000 each, your odds of losing everything would drop to just 0.01%.

However, the amount you’re betting each time would still be pretty high.

10% of your total capital.

That means if one of your trades goes sour, you lose 10% of your money.

If you stuck with the 2% rule you’d only bet $200 per trade.

Not only does this put a firm manageable cap on how much money you can lose for each trade, it virtually eliminates your chance of losing everything If you remember from our previous video, the risk of a trade is calculated by taking the difference between the entry price and stop-loss price and multiplying by the quantity traded meaning with the 2% money management rule, the only way to lose all your trading capital is to lose 50 times in a row, and the probability of that happening is less than 1 quintillion percent.

Now those are sound odds!

After all, as a money manager, your focus shouldn’t be on making the most money; that’s what a gambler does.

Your focus should be on ensuring that you do not lose your capital.

It’s like Warren Buffett once said the number-one rule is to not lose money and while there will always be stories of traders blowing up their account, if you stick to the 2% money management rule, it is virtually impossible for you to do the same and not only that, it’ll also help you improve your trading results across the board.

That’s it!

For our next video we’ll look at how to place orders and enter trades.

The Math Behind Trading

Before making your first trade, you need to understand the mathematical logic behind trading.

This will allow you to balance risk versus reward.

Determine when to enter and exit a trade and ensure that you win in the long run.

In general, the profitability of your investment account depends on two factors: your hit rate and the risk to reward ratio of each trade.

Your hit rate is the percentage of winning trades, so if you make ten trades and win six, your hit rate is 60%.

Now, your hit rate doesn’t factor in how much money you made or lost in those trades, just whether or not you won.

If you trade using good setups and solid strategies, you should achieve a hit rate of about forty to sixty percent.

The next thing to look out for is the risk to reward ratio of a trade, otherwise known as the RR ratio.

This will help you achieve big wins, while keeping your losses low.

After all, like the famous financier George Soros once said, it’s not how often you’re right or wrong, but rather how much you make when you’re right and how much you lose when you’re wrong.

So if you only get it right 40 percent of the time, you want to make sure those trades make way more than all the losing trades.

The RR is calculated using three numbers. First, the EP or entry price: this is the price at which you enter the trade.

Next, the TP or target profit: this is the price you expect the stock to reach.

Finally, the SL or stop-loss: this is the price at which you will definitely get out of the position.

To calculate reward, you take the difference between the TP and the EP; while the risk is the difference between the EP and the SL.

The RR ratio is then calculated by taking the reward and dividing by the risk. Hence, the higher the reward, the better the RR, and the lower the risk, the better the RR.

Generally, you should be aiming for an RR of at least two to three, this means that your potential upside is two to three times your potential downside on some trades.

It might even be possible to get an RR of seven to ten.

Risk management is such an important part of trading and has such a huge impact on your profit and loss.

For instance, if you have a hit rate of only 40% but an RR of two, you’ll still end up profitable in the long run because remember, success isn’t about winning every trade, it’s about making those wins count.

The Top 3 Economic Indicators

In our previous videos, we’ve learned the importance of tracking the big market cycles and how fundamental and economic forces drive those movements in this video. We’re going to look at the top three economic indicators to look out for. In the past, only experienced professionals and economists received this data in a timely fashion, but in the Internet age everyone has access to dozens of economic surveys and indicators every week.

This data can be divided into three main groups: interest rate and monetary policy, employment and jobs data, and consumption and production data.

Now, keep in mind most of this data is based on the US economy since it’s the biggest financial powerhouse that moves global markets.

So, first let’s look at interest rate and monetary policy. For the US, the Federal Open Market Committee or FOMC makes scheduled announcements 8 times a year regarding interest rate or monetary policy. This can have a major impact on the markets because it affects the cost of borrowing and the money supply in the market. Other economies such as the eurozone, China, Australia, Japan and Switzerland have their own scheduled announcements where they set their interest rate and monetary policy.

Next, employment and jobs data. This data is very important because job creation is a leading indicator of consumer spending, which accounts for a majority of overall economic activity. The most important figure is the non-farm payroll which accounts for approximately 80% of the workers who produce the entire gross domestic product of the United States. This vital piece of economic data is released monthly usually on the first Friday after the month ends. The combination of importance and earliness makes for hefty market impacts. Other indicators include the employee cost index or ECI employment situation report and weekly jobless claims report.

Finally, there’s consumption and production data. There are various reports that measure different aspects of consumption and production, so it’s up to the savvy investor to piece it all together. Some examples include the Gross Domestic Product or GDP, Purchasing Managers Index or PMI, Philly Fed Report, Consumer Confidence Index, Producer Price Index, Consumer Price Index and the existing home sales report and housing starts. In general, the key is to look out for the kind of news that’s relevant to the current market climate.

For example, when the stock market has been bullish for many years and interest rates are really low, astute investors will keep their eyes peeled for any indication about interest rate increases as these will have a major impact on the market.

So remember, do your research and always make informed investment decisions.

An Easy Way to Diversify your Investment Portfolio

You’ve probably heard about the importance of diversifying your portfolio.

The question is how do you do it and what if you have limited capital to invest and can’t afford to purchase a lot of different stocks at once? In this video, we’ll introduce you to two new asset classes: exchange-traded funds or ETFs and real estate investment trusts or REITs. These will enable you to diversify your portfolio and generate passive income without having to invest too much. First, let’s look at ETFs also known as tracker funds.

ETFs track the performance of a stock index like the STI Dow Jones Hang Seng or commodity and bond indices. These are useful for new investors because by simply investing in ETFs you’re effectively investing in the price movements of all the companies listed on the underlying index. This makes it much easier to diversify your portfolio, then if you picked individual stocks and commodities especially if you’re starting out with limited capital.

Besides stocks and ETFs, however, there is another popular asset class, one that’s been around for thousands of years. Yup, real estate. So, how can a new investor with limited funds, invest in this market? Through a real estate investment trust or REIT.

A REIT is a company that invests in real estate properties and by investing in a REIT, you can share the benefits and risks of owning a real estate portfolio. In short, a REIT allows you to buy and sell properties as if they were stocks by buying a stake in a REIT.

You are effectively vested in all the properties owned by the REIT, so as the REIT makes its profits from asset appreciation and rental income, you will receive regular payouts which can provide you with passive income.

We’ve come to the end of part 1 of our video series. We hope you’ve learned the importance of making your money work for you and the different asset classes and opportunities that are available to you. In the next part of our series, we’ll explore the big market cycles and find out how to better time your purchases so you can receive the biggest benefits possible.