The Beginner’s Guide to Trading & Technical Analysis
Can I Make Money from Trading?
How to Trade for Beginners
On a day to day basis, the price of every financial product moves up and down, for example you hear about stock prices moving up, or oil prices crashing, for different currencies appreciating or deprecating against one another.
At its core, learning how to trade is simply being able to make a profit from capturing these price moves.
If you buy a stock and it moves up, and you sell it at a higher price, you would have captured that price move and made a profit. Do this multiple times successfully, and you would be able to make a full-time living off it.
Of course, not every trade is going to be profitable, because sometimes you might get it wrong. But after making say 50-100 trades, if you are able to consistently make money, then it means you might have a winning trading system for how to trade in the markets.
If you have ever been to a casino, you will know that over the long run you will lose money because the odds are against you. Although the casino’s edge is very small, over the long run and over a large number of transactions, it adds up to huge profits.
Knowing how to trade is somewhat similar. If you can find an edge (through your analysis), exploit it over a large number of trades (money management), and can do it consistently without letting your emotions get in the way (mindset), then you will have a chance to become very successful in trading.
Trading vs. Investing
The first problem many people face is not knowing whether to use their money for investing or trading. Since they usually start off with a fixed sum of money, they have to decide on one or the other to start off.
Many people will small sums of money then make the common mistake of “playing it safe”, perhaps after hearing stories of Warren Buffett or about how “risky” trading is, and then decide to just put their money in things like bonds or ETFs, with a low return of 1-5% a year.
The problem with this approach is that unless you have a large amount of money to start with, you will take a whole lifetime just to build a decent-sized portfolio. For example, if you consistently grow your portfolio at a compounded rate of 3% every year with no losses, it would take you 24 years just to double your portfolio. And what happens if you get caught in a market crash?
For a more detailed explanation, here’s a video tutorial discussing whether you should start off with trading or investing:
So if you are starting with a small sum of money, it definitely makes more sense to focus on trading at the start, which can give you 3-5% monthly cashflow, which you can then use to grow your long-term investment portfolio faster.
As a simple rule, I would suggest for you to focus on trading until you have at least $100,000 capital before you start looking to do investing.
And once you have hit that milestone, you can continue to do both trading and investing, because trading can provide monthly cashflow, while investing can provide long-term passive income, so they both complement each other.
How Much Capital Do I Need to Start Trading?
For new traders looking to start out their journey, what is the minimum amount of capital you will need to start trading?
What is the optimal amount of capital you should use to ensure that you take your trading seriously?
The answer to this question is quite simple – you should find an amount which is not so large that you cannot afford to lose, yet is not so small that you do not have any “skin in the game”.
And lastly, does it make sense to start out with demo trading?
For a more detailed explanation, here’s a video tutorial on how much capital you will need to start trading:
The 3 Ms of Trading – Method, Money, Mindset
What to Focus on in Trading?
Having studied many professional traders, I found that there are 3 crucial factors that have led to their success.
All these market wizards have found success because they have understood and mastered the 3Ms of trading – Method, Money and Mindset.
Method (chart-reading): Process by which a trader enters into the market, using either technical or fundamental inputs to make their decision.
Money (risk management): This includes capital allocation, risk parameters (drawdown limits), risk-to-reward calculations (entry price, profit target, stoploss).
Mindset (psychology): Market psychology the most important part of trading, and determines how well you can execute your trading plan in the markets in real time.
To many new traders who know of these 3Ms, they tend to make the mistake of giving equal weightage to all 3 parts, or even worse, almost 100% weightage to the “Method”, while ignoring the “Money” and “Mindset”.
So their focus on trading might look something like this:
In reality, a professional trader should allocate the 3Ms as depicted below here:
The psychology (mindset) is the hardest part of trading because emotions like greed and fear run wild once your money is at stake in the market.
Hence, your degree of rational analysis is only limited to how well you can manage your psychology.
Without the execution, the plan is useless. The money and risk management is also essential because it ensures your survival and consistency in the markets.
After all, the number one rule is capital preservation.
“Don’t focus on making money; focus on protecting what you have.” – Paul Tudor Jones
Methodology (10% Focus)
Methodology refers to your method of analysis, your strategy, your setups, basically the basis on which you make your buying and selling decisions.
As we will be covering in the upcoming chapters, the most common tools used to make such decisions are technical analysis, fundamental analysis, or some combination of both.
Money Management (30% Focus)
Money management, or risk management, refers to how well you use your trading capital, to maximize your returns, while at the same time minimizing your risk.
This includes your capital allocation per trade, such as the 2% money management rule, and also things like risk paramaters for each trade, such as maximum drawdown limits.
This means that for each trade, you will need to decide on the entry price (EP), stoploss price (SL), and target profit (TP) before you make each trade, so that you will be able to calculate the reward-to-risk (RR) ratio to decide whether it is worth taking the trade.
To be profitable in trading, all you need is a good balance between the win ratio (aka. hitrate) and the reward to risk ratio, to ensure that you have a net positive expectation on every trade.
For example, if you have a 40% win ratio, and your reward/risk ratio is 2, you will still end up net profitable in the long run.
Mindset (60% Focus)
The mindset, or trading psychology, is definitely the most important aspect of trading, and it is also the hardest to master.
This will determine how well you can make good decisions under stress, and consistently execute your trading plan without getting swayed by emotions.
Thinking accurately requires a certain level of self-awareness, so that we can avoid any behavioral biases that skew our rational thinking and decision-making process.
What Products & Markets Should I Trade?
Markets vs. Products
The next major decision you have to make as a trader is to decide what markets and what financial products to trade, since there are many options available.
Do note the distinction between markets and products, as they are two very different things.
The market is where the transactions take place, while the products are what you will be buying and selling in the market.
Overview of Financial Markets
The major financial markets are those for stocks, bonds, commodities, forex, cryptocurrencies, and derivatives.
1. Stock Market
The stocks of each country are traded on their own centralised exchanges, so this means that prices should be the same across different brokers.
The stock exchange will also offer complementary products, such as ETFs (exchange-trade funds) and REITs (real estate investment trusts), which you can trade on the same exchange.
If you are an investor, stocks (or shares as some people call it), are basically ownership in a business/company, so when you buy a stock, you essentially own a small percentage of the company. So you will be hunting for the best businesses at good prices.
If you are a trader, you will be looking for stocks that are more actively traded, so there will be good liquidity and price movements for you to capture. Many traders prefer the US stock market, because it is the largest and has excellent liquidity and low transaction costs.
2. Bond Market
Bonds are loans that are made to businesses (corporate bonds) or to the government (government bonds), on which the lender is obliged to pay back the capital plus interest. As interest rates fluctuate, the prices of the bonds will also change.
Most of bond trading is done by financial institutions on the decentralised OTC (over the counter) market, with a small number of bonds like on exchanges.
Most retail participants buy bonds for investment or to provide stability to their portfolio, but not many people actually trade bonds actively, since price movements are small and hence large funds or large leverage is required.
3. Commodities Market
The commodities market includes metals (gold, silver, platinum), energy (crude oil, natural gas), food (sugar, coffee, cocoa), diamonds, etc.
Although it started out with physical trading, nowadays most transactions are based on financial derivatives.
These derivatives include forwards, futures, swaps, options, CFDs and in 2003, ETFs (exchange traded funds) and ETC (exchange traded commodities) were also added.
For retail traders, the most commonly traded derivative is probably CFDs, due it’s low starting capital requirements and low commissions.
4. Forex Market
Forex, or currencies, refers to the exchange rate between 2 different currencies. If you think that one currency (eg. EUR) is going to appreciate against another currency (eg. USD), you can buy a contract of EUR/USD, which is essentially the same as selling USD to buy EUR. This is no different from what you do when you go to the money changer before you embark on your vacation overseas, albeit in much larger quantities.
There is no centralised exchange for forex, so brokers and financial institutions tend to be market makers, meaning they take the opposite side of any trades that you wish to make. This also means that prices may vary slightly across different brokerages.
Forex is one of the most popular products for new traders, because the market has good liquidity, long trading hours, decent price movements, and low transaction costs even for very small accounts.
5. Crypto Market
Cryptocurrencies, or crypto for short, is a relatively new asset class which is meant to be a sort of global currency, but adoption is still not widespread, although it is growing steadily. From a market perspective, it is pretty much the same as foreign exchange, meaning you can trade it against normal currencies.
There are exchanges that allow you to trade between cryptocurrencies and fiat currencies, and other exchanges that allow you to trade between different cryptocurrencies. Some exchanges allow you to do both.
Due to its lower liquidity (besides Bitcoin, all other products do not have much volume) and quite often erratic price movements, this market is not that good for trading at the moment, although things might change in the future.
6. Derivatives Market
In addition to taking a direct position, there are also financial products that allow you to take an indirect position in the market. These products are pegged to prices of particular markets, and their prices are derived indirectly from these markets.
Hence, they are known as derivatives, and some examples include forward contracts, futures contracts, CFDs, options.
Forwards (or forward contracts) are agreements between a buyer and seller to trade an asset at a future date. The price of the asset is set when the contract is drawn up. Forward contracts have one settlement date—they all settle at the end of the contract.
Futures (or futures contracts) are similar to forward contracts, except that they are traded on an exchange and are settled on a daily basis until the end of the contract. Forward contracts are used primarily by hedgers who want to cut down the volatility of an asset’s price, while futures are preferred by speculators who bet on where the price will move.
CFDs (or contract for difference) are a way to profit from price movements without owning the underlying asset.
Options grant you the right, but not the obligation to buy or sell an underlying asset at a set price on or before a certain date.
These products are quite versatile, so you might have combinations like stock options, Oil CFDs, Gold forwards, bond futures, etc.
What is the Best Product to Trade?
While it might seem confusing because there are too many choices, my advice to new traders is to pick one market and master it before deciding to explore other markets.
Here are some characteristics of good products:
- Has good liquidity so that you do not see erratic price spikes on the chart
- Has decent price movement so that you can actually make money from the price movements
- If you are intraday trading or swing trading, you do not want to pick a slow moving stock which only moves a few % each year
- If you are swing trading, you also won’t want to trade a penny stock which can fluctuate 10-20% in a day
- Low transaction costs, even for small accounts
- Has freely available price data for charting
- Has good coverage on news, blogs, etc, which will make learning easier
Most new traders will start off with the easiest products like forex, stocks, or CFDs.
What is Technical Analysis?
What Moves Prices?
Despite all you read in the news, there are only two things that move all prices. They are supply and demand – nothing more and nothing less. This is the foundation of basic economics as shown in the graph below. Since quantity remains the same, price is what fluctuates as a results of supply and demand.
If there is more demand than supply for a stock, then the price shall rise. Conversely, if there is more supply than demand for something, then the price shall fall. This is absolutely true in any market.
The next question is what affects the supply and demand for a particular security or traded instrument. Is it the profits in the financial statements? The upcoming expansion plans? The new product? Is it dividend payments? No one can be absolutely sure at any point why people may be buying and selling shares. That’s where technical analysis comes into play.
At no time does technical analysis attempt to determine why there might be supply and demand, only that there are certain levels of supply and demand. By studying actual movements in the price and volume, we can go a long way to determining what the present demand and supply is and therefore predicting the future direction price will take.
All fundamental and economic influences on a share price are already taken into consideration in the market, which is reflected in the price. As a trader, what you are buying and selling is the actual price, not financial statements or ratios like the P/E ratio or ROE figures. Ultimately, it is the price that ultimately determines whether you make money or not, and what you think the price should be has NO influence whatsoever on the price.
The next big revelation is that the bulk of supply and demand does not come from retail traders or retail investors. They come from the big boys (BB) and smart money (SM) like traders and fund managers in banks, funds and other institutions. They are the ones who move the market. Learning to interpret price action and volume is our window to tap into their psyche and profit from their actions.
Supply refers to the sellers (bears) who are looking to sell (which pushes prices down), whereas demand refers to the buyers (bulls) who are looking to buy (which pushes prices up).
The constant battle between the buyers and sellers creates fluctuations in prices, which can be as short as a few seconds, or create trends which can last for years.
As a trader, finding the sweet spot where there is an imbalance in the forces (such a a huge build-up of buyers or sellers on either side) can give you an edge in the market, so that you can enter the market just as a big move is about to occur.
What is Technical Analysis?
Technical analysis is the studying of charts (price, volume, etc) to understand the current supply and demand, which allows you to predict the future probabilities of whether prices will head up or down, thus giving you an edge to take calculated risks.
There are 2 main schools of thought – the classical approach vs. the statistical approach.
The classical approach came about before there were computers, when people manually plotted charts on graph paper, and drew lines (support, resistance, trendlines, channels) to identify behavioral patterns and price chart patterns. Even now, it is still widely popular.
The statistical approach uses data and mathematical formulas (indicators, algorithms) to find mathematical patterns and predict probabilities.
Personally, I find the current best approach is to use a combination of both. Just like in driving, you can rely on the autopilot to help you do calculations and provide useful input, but in certain scenarios it is better to manually take over.
Technical Analysis vs. Fundamental Analysis
For many new traders, one of the most common question I get is regarding the method of analysis to use, and it usually boils down to technical analysis vs fundamental analysis.
Technical Analysis (TA) gives you a fast and simple way to scan through data, find good opportunities, and make a trading decision.
Fundamental Analysis (FA) helps you understand the big picture and why prices are moving in certain ways.
Personally, I find that the best approach is to combine them to get the best of both worlds.
For a more detailed explanation, here’s a video tutorial on the difference between technical analysis and fundamental analysis:
Tools & Techniques of Technical Analysis
How to Read Price Charts
As we mentioned in the previous chapter, there are buyers and sellers, and a transaction happens when both a buyer and seller agree to transact at a particular price.
As the number of buyers and sellers in the market vary, so does the supply and demand, which causes the price to change continuously.
A price chart is simply a way to visually represent all the transactions that take place for a particular product, over a certain period of time. By plotting it out, it makes it easier for us to study the price trends over time.
While there are many types of price charts, such as bar charts, line charts, renko charts, kagi charts, etc, the most commonly used chart nowadays is the candlestick chart, so I will be using it for all my examples.
In the example above, you can see that prices are plotted as the y-axis, while time is plotted as the x-axis, so as we view the chart from left to right, we are observing how prices change over time.
Since this is a daily chart, 1 bar represents 1 full day of transactions. In trading terminology, we will say that the chart timeframe is the daily timeframe.
Some common timeframes include M5 (5 minutes), M15 (15 minutes), M30 (30 minutes), H1 (1 hour), daily (1 day), weekly (1 week), monthly (1 month), etc.
In the same example above, you can see that if I switch to a 1 week (5 trading days) timeframe, all that data in the box will be compressed into 1 bar. And if I switch to a monthly timeframe, all the data in the 1 month box will be compressed into 1 bar.
If you look at the bottom of the chart, you will see red and green bars, these represent the volume, which is the number of transactions that occur in that period of time corresponding with the price change.
Generally, the bar is green if price closed higher (relative to the close of the prior bar), and it is red if the bar closed lower.
So this is how the same chart will look like as I toggle between the daily chart, weekly chart, and monthly chart.
As you go to a higher timeframe, you will notice that the chart gets “cleaner” and less granular, which makes it easier to study long-term trends by removing the noise, but on the downside it contains less data.
Personally, for my own trading, I like to stick to the daily chart, because it works well for swing trading.
How to Read Candlesticks
Now that we have learnt how to read price charts, the next step is for us to zoom in on the individual bars that make up the price charts.
Since these charts are called candlestick charts, the individual bars are called candlestick bars. For convenience, most people will also refer to them simply as price bars.
Each candlestick bar consists of 4 data points:
- Open – this is the opening price of the bar, which refers to the first transaction which occurred in this time period.
- Close – this is the closing price of the bar, which refers to the last transaction which occurred in this time period.
- High – this refers to the highest transaction price which occurred in this time period.
- Low – this refers to the lowest transaction price which occurred in this time period.
Based on these 4 data points, all candlestick bars will have 2 components:
- Body – this is the “fat” part of the candle, and its length is determined by the distance between the open and close.
- White body – If the closing price is higher than the opening price, it means that prices moved up, and it represents bullishness.
- Black body – If the closing price is lower than the opening price, it means that prices moved down, and it represents bearishness.
- Shadow – this shadow is the “thin” part of the candle, and represents the extreme moves of prices within the bar.
- Short shadow – this signals low volatility and less uncertainty.
- Long shadow – this signals high volatility and more uncertainty.
I will be covering more of this in my price action trading guide, so for now here are some simple rules for analysis.
- A lot of long white bars
- Short or no shadows on the top of bars
- Long or no shadows on the bottom of bars
- A lot of long black bars
- Short or no shadows on the bottom of bars
- Long or no shadows on the top of bars
Main Types of Technical Analysis
There are 3 main categories of technical analysis methods that are used by all traders:
- Classical charting
- Technical indicators
- Price action
Since I will be doing separate guides for each of these methods, for now I will be briefly going through each one.
1. Classical Charting
These were the very first tools developed by traders, back when there were no computers and charts had to be plotted and analysed manually.
They include things like swing counts, support and resistance levels, trendlines, channels, price patterns, etc.
Even today, most traders still use these methods, usually in conjunction with other methods.
2. Technical Indicators
With the advent of computers, traders started using them to crunch numbers, and by applying mathematical formulas (using the open, high, low, close, volume data) were able to add another dimension of analysis which was not always obvious by visual observation.
There are thousands of indicators, but the common ones used are moving averages, MACD (moving average convergence divergence), RSI (relative strength index), Stochastics, Bollinger Bands, etc.
3. Price Action
Price action is a pretty broad category, but the main idea is to study the movement of price, while understanding the underlying reasons for such moves.
In the past, one such method was tape-reading, which has now evolved to reading the price ladder and order flow. but these are more for intraday traders on very short timeframes. I used to do that when I was trading for funds.
For retail traders, the more common approach is to study candlestick patterns, which is to identify unique clusters of bars, but for more advanced price action, it involves studying every single individual bar.
Most traders will use a combination of all 3 methods, since they are not mutually exclusive. The idea is to find a combination of tools that can enable you to find good trading opportunities with the least amount of effort.
Exotic Analysis Methods
In addition to the mainstream methods used by professionals, you might also come across online some exotic and unorthodox methods:
- Fibonacci analysis
- Elliot wave theory
- Gann theory
- Harmonic patterns
- Dow theory
- Ichimoku Kinko Hyo (Cloud charting)
- Volume Spread Analysis (VSA)
- Market profile
- Pitchfork analysis
- Point and Figure (P&F)
- Cycle analysis
Many of these theories were very popular at some point of time in the past, but after the hype died down, or newer methods replaced them, their use was mainly confined to hobbyists or niche bloggers.
I have read and studied all of them previously, so if time permits in the future, I might do some fun guides for some of them.
Common Trading Strategies
The Different Styles of Trading
There are 3 main styles of trading, and by styles, I mean the way you approach trading, and this in turn will determine your holding period, timeframe, time commitment, and the products you trade.
Here are the 3 main styles:
Short-term trading is mainly for people who are doing it full time, and includes day trading (closing all positions by the end of the day) and scalping (taking extremely short-term positions which can last seconds).
Traders will mainly be using 5-minute or 15-minute charts, or even shorter timeframes, so this means that they will need to check their computer screens every few minutes, or stare at it constantly. This can be quite stressful for beginners, hence it is strongly not recommended.
The products traded will tend to be very liquid, have low commissions, and have significant price movements during the course of a day. These include forex, futures, and larger stock markets.
Medium-term trading is the most ideal for part-time traders, as it does not require much monitoring of the markets. It is also known as swing trading, as it captures the “swings” in the markets.
Traders will mainly be using the 4-hour or daily chart, so they will only need to check their charts every few hours or even once a day, making it ideal for people who have full-time jobs and do not want to spend too much time looking at charts.
The products traded will tend to be those more customised to retail traders, such as forex, CFDs, and stock markets that do not have too high transaction costs.
Long-term trading is suited for people who do not have any time at all, and this includes position traders and investors who take long-term positions that can last weeks or months.
Traders will mainly be using the daily chart or weekly chart, meaning they will probably only be checking up on their positions weekly, monthly, or even quarterly. This is the most hands-off option, but it also requires a lot of patience, and is not suitable for people with little capital since your capital is going to get locked up for long periods of time.
The products traded will tend to be more asset-based, such as stocks, ETFs, REITs, or other assets which can appreciate over time and pay dividends.
The 4 Main Types of Trading Strategies
In trading, despite the countless different strategies and setups that are used by traders all over the world, all these strategies can actually be traced back to these 4 core types:
- Break (trading breakouts)
- Swing (trend-following)
- Bounce (counter-trend, mean reversion)
- Turn (market reversals)
Each strategy type has its pros and cons, so in the future, when someone shares a trading strategy with you, you will instantly be able to see which category that trading strategy falls under, and hence deduce the pros and cons of the strategy.
1. Break (Trading Breakouts)
Breakouts happen when the market is in the ranging phase, and there is no clear trend in the market. As both the bulls and bears fight to gain control of the market, at some point either side wins, and prices break out of the sideways range and starts moving explosively in one direction.
2. Swing (Trend-following)
When the market is trending or starting to trend, it makes sense to ride the trend. Trend-following strategies are designed to detect the start of such trends, and get you in on them, as well as getting you out once the trend is over.
3. Bounce (Counter-trend, Mean Reversion)
Occasionally, there might be exceptionally strong short-term movements in the markets, such as a price spike on a news announcement, or a climatic buying or panic selling. When that happens, prices usually become overbought/oversold, and prices will have a rebound back to “normal” levels.
4. Turn (Market Reversals)
All markets and products follow certain large economic or trend cycles, which means that no matter how strong the trend, at some point it will exhaust the move and lead to a change in direction. This usually results in major turning points in the markets.
Bonus: Daily Trend Analysis (Telegram Channel)
How to Create a Trading Plan
Key Ingredients of a Winning Trading Plan
If you have ever tried starting a business, you will know that the first thing you will need is a business plan, which states out from A to Z your business idea, how you will go about executing the plan, and the ways to measure the performance, etc.
The same goes for a trading plan.
Before you start trading, you will need a comprehensive trading plan that covers:
- Your general strategy and approach
- Markets and products to trade
- Starting capital and allocation strategy
- Specific rules for entering and exiting a trade
- Trade parameters (entry price, stoploss, target profit)
- Risk parameters (risk per trade, open risk, monthly risk)
- Evaluation metrics (how to measure and improve performance)
- Trading psychology rules to keep your emotions in check
Remember, the purpose of your trading plan is to separate the “planning” phase from the “execution” phase, so that when the market is open, you can focus on executing your trading plan, instead of having to plan and execute at the same time.
What Trading Rules Do Professionals Use?
Have you ever wondered how professional traders see the market differently?
How do they continue to make exceptional returns day after day, while 90% of retail traders lose money on a daily basis?
Here are my top 10 trading rules I developed, after over 10,000 hours of trading professionally, and I hope that this will help you take your trading to the next level.
Good luck! 😀
1. Always be disciplined
- Follow your plan and rules
- Do not be swayed by your emtions to act otherwise
- Do not create excuses to break the rules – this time is NOT different
2. Plan the trade, trade the plan
- Always cut your losses according to plan
- Always cut your profits run according to plan
- Separate your planning from your execution
3. Expect losses
- Losses are part of trading – accept them. This will reduce emotional resistance when the time comes to do so.
- Do not take a trade unless you are willing to accept the risk (possibility of loss) that accompanies the trade
- Accept that you willlose money on some trades
- Take your losses easily when they come
- Do not be stubborn and bend your rules
4. Manage your emotions
- When i doubt or unsure, get out!
- Always analyze objectively
- Clear all positions to have a neutral frame of mind
- Do not act based on greed or fear
5. Focus on trading well
- The goal of a trader is to make the best trades
- Money will naturally follow
- If you focus on money, emotions will get in the way and you will not be able to make the best trades
6. Do not overtrade
- Be patient. Do not rush into a trade.
- Do not trade when there are no good setups
- Do not try to be in the market all the time
- It is better to miss a boat, than to leave on one full of holes
- One good trades is better than three bad trades
- “There is a time to go long, a time to go short,and a time to go fishing.” – Jesse Livermore
7. Trade what you see, not what you think
- Don’t concern yourself with why things are happening
- Observe what is happening, and act on it
- Ignore the noise – tips, rumours, news, speculations, etc
- Anticipate the future, but trade in the present
- Markets are never wrong, opinions are
8. The trend is your friend
- Don’t enter just because it looks “overbought” or “oversold”
- Don’t try to catch a falling knife
- The easiest money is made trading with the trend
- Make sure you have an edge before you enter the market
- Put as many factors in your favour as possible
9. Do not repeat your mistakes
- Keep good records of your trades and thought process
- Analyze your mistakes, then move on
- Do not make the same mistake again
- Continuously improve yourself
10. Have realistic expectations
- Do not try to make stellar returns overnight
- Aim for small consistent returns over a period of time
- Do not expect to become an expert overnight
- Trading takes time to build experience
Common Mistakes to Avoid in Trading
Do Not Rely Too Much on Indicators
One of the most common mistakes for new traders is to rely too much on indicators, and to end up using too many indicators.
Traders need to keep in mind that indicators are just mathematical formulas which help to calculate the probability of which way prices are heading, and they do provide a useful INDICATION, hence the name INDICATOR, but I find them less useful in providing absolute buying/selling rules.
Personally, I prefer to focus on price action analysis and classical analysis, while using indicators as an additional indication to aid in the core analysis.
In addition, while using indicators, it is important to know the formula and calculation of the indicator which you are using, so that you know the raw data inputs which go into the calculation.
This will help you avoid using multiple similar indicators which use the same data input (and thus end up providing false confirmation), and will allow you to know which situations your chosen indicators will work well or will not work well.
For example, lagging indicators are more useful for defining long-term trends, but are hopeless for tracking short-term momentum and reversals.
The Quest for the Holy Grail
Another big danger to new traders is the idea of the holy grail of trading.
The holy grail can appear in many forms – a “sure-win” indicators, a “100% win rate” trading system, a “legendary” guru, or a “unique proprietary” software guaranteed to make you rich overnight.
They all hold the same promise – to make you rich quickly with little effort.
Unfortunately, there is no shortcut to success, no magic bullet that will make you a super trader overnight.
It takes hard work and dedication if you want to enjoy the bountiful financial rewards. For me, it took about 7 years before I managed to make my first million from trading, and it took a lot of hard work.
So, my advice to new traders is to stop jumping from system to system, hoping to find the holy grail (which does not exist).
Instead, start learning as much as you can, then find a good system and work with it until you find success.
Dangerous Myths About Trading
If you listen frequently to the mainstream media, or take advice from friends and family who are not traders themselves, they might give some good-intentioned but ill-informed advice, which could harm your trading results.
Such dangerous myths about trading might seem to be “common knowledge” because they keep getting repeated frequently, but have you stopped to consider whether they are really true?
Here are some common myths:
- Trading is very risky because you can lose all your capital
- Forex is more risky than stocks
- Leverage increases your risk
- You need a lot of capital to start trading
- You need to trade very often if you want to make more money
- You need to monitor prices and charts 24/7
- Brokers are out to hunt your stoploss
Do these sound familiar?
How to Start Trading Immediately
Compilation of Best Trading Tools & Resources
- Where can I find a list of all the trading terms and jargon?
- What are the all-time best books on trading and investing?
- What brokerage should I use to start trading?
- What software should I use for charting & analysis, and for executing my trades?
Should You Start with Paper Trading?
When you are starting out, it makes sense to start with less capital, and focus first on honing your trading skills. You can always scale up gradually as your skill improves.
This makes sense because most mistakes are made when you are starting out, and the idea is to minimise the cost of your initial mistakes.
So, does it make sense to start off with paper trading?
Paper trading, or demo trading, or virtual trading, is the idea of trading with fake money, thus simulating the experience of trading, yet avoiding the risk of losing any money.
This can be a good idea for the first 10-20 trades, where you just want to get an idea of how to execute trades, and the process of managing the trades.
However, the main problem with this is that you cannot learn any trading psychology if you only do paper trading. (Recall that mindset, or trading psychology, is a major factor in trading success.)
Imagine playing poker using fake money. Is the game experience still the same?
Trading, similar to poker in some ways, tests your ability to make good and sound decisions under the stress of having money at stake. Without the skin in the game, the learning experience is simply not the same.
Hence, my advice to new traders is to start off with paper trading for about 10-20 trades, then move on to trading a small trading account (of real money), so that you can get used to being able to execute your trading plan even when there is money at stake.
It doesn’t matter how small you start with, as long as it is real money, then you can slowly scale your way up as you gain confidence and results.
Remember to Keep a Trading Journal
As you start your journey, one very important habit to cultivate is to have a trading journal to record your journey.
Here are some essential things that you should be recording in your trading journal:
- Planning of your new trade – why is this a good trade?
- Execution of the trade – what was your reason and analysis at each decision point during the trade?
- Record the trade – what style, product, timeframe?
- What was your entry price, stoploss price, target price?
- Attach a chart of your entry and exit
- What were your emotions throughout the trade?
On a weekly basis, review your trading journal to look for areas for improvement:
- Did you follow your trading plan?
- For each trade, why was it a winning trade, or why was it a losing trade?
- For losing trades, was it due to poor execution, or due to market conditions?
Remember that all successful traders keep a trading journal, and this is a standard practice for all traders funds and financial institutions.