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Learn To Trade

Learn To Trade: So, you want to become a trader and make a great deal ofonline stock trading money, have financial independence, and never have to go to work for someone else again! You have come to the right place to learn to trade -so let's start trading online!! Is it possible? - it is, but you have a great deal to learn and the place to start is at the beginning !

Please understand that this is purely an introduction to some of the more basic concepts of trading. I cannot possibly cover everything that you need to understand, learn and practice. I hope that this will form the basis and point you in the right direction, hopefully avoiding some of the costly mistakes that I made to get to this stage.

In order to learn to trade, you have to start with an understanding of risk, so let's start with risk - understanding risk and your attitude to money will be fundamental in all your online trading and investment. It is vital that you understand the risk in each market, and your own personal view of risk tolerance. Your personal values and beliefs were laid down in the first few years of childhood, by your parents, relatives, mentors and teachers. They cannot be changed, so you need to have a good understanding of your attitudes and views in both making and losing money. Some people will never be able to trade, as they cannot accept that to make money, you have to accept losses.

Start Trading - Trading Risk

The Financial Market Degree of Risk Involved
Currency Very high risk - level 12
UK/US Futures, Options, Derivatives High risk - level 11
US Equity options High risk - level 10
UK Spread Betting High risk - level 9
UK Penny shares High risk - level 8
US NASDAQ stock Medium risk - level 7
US S & P 500 stock Medium risk - level 6
US DOW 30 stock Medium risk - level 5
UK AIM shares Medium risk - level 4
UK Equity options Low risk - level 3
UK FSTE 250/350 shares Low risk - level 2
UK FTSE100 shares Low risk - level 1

Now the above is only a rough guide, but hopefully it will give you some idea as to which markets are higher risk that others, as you begin your journey of learning to trade, and as a general rule, any markets which require trades to be leveraged ( more on this later ) where you trade using margin, are going to be much higher in risk than those where you are trading with 100% cash, such as a simple share or stock.

If You Lost This Amount The Pain of Losing
A hundred thousand dollars Unthinkable loss - bankrupt
Fifty thousand dollars May never recover emotionally
Ten thousand dollars A major loss - takes time to recover
One thousand dollars Hurts, you think about if for days
One hundred dollars Annoying, but forget it and move on
Ten dollars It happens - forget it

I think the above is self explanatory, and hopefully will start you thinking about how you view risk and money. It is a fundamental concept and you must be honest with yourself. Some people are just not made to be traders and take risks. I will explain the difference between a trader and an investor later.

Remember, if you do not trade using proper money management you risk losing all your money. If you trade using margin (which is effectively borrowing from your broker ) you risk even more! You will have to accept that all investors and traders lose money at times - it is a fact of life and part and parcel of trading. The key to success is to only lose small amounts. OK, now let's consider some other basic concepts.

Learn To Trade - Basic Trading Concepts

Understand your own personality - you may not be suited to trading or investing - some women ( and men) are not - this is not a fault, it is simply your personality and your own view of risk. To learn about yourself, and whether you may be suited to trading, take a simple test which will give you a much better understanding of whether you would be comfortable with the ups and downs of the markets. There are several free ones on the internet. I have devoted a page on the site to the psychology of trading, and a separate web site will be available shortly. Here you will find links to several tests. Once you have completed one or two, be honest with yourself. Some people are just more comfortable with their money invested in simple high interest accounts, government bonds, even premium bonds. UNDERSTAND YOURSELF FIRST

online stock trading option forexUnderstand where you are in your life and your responsibilities, obligations, current and future financial needs. Try to consider your family's views of how they would consider you as a trader or taking responsibility for some of the family's investing. Think of what your partner, spouse, parents, children, friends etc would say - would they be supportive, understanding, or reject your ideas. It is critical, if you have a partner, that they understand what you are doing, why you are doing it, and are supportive. It is fatal to try to trade in secret! If you are single with fewer responsibilities then this is less of a issue. Also try to imagine where you are in your life financially, and where you would like to be in say 5 years time ( be realistic!), as this will tend to affect the type of trading and investing that you consider, and also the amount of money you would feel comfortable putting in the market. You will also need to consider your short, medium and long term goals. I have tried to give some examples below, but please remember these are fictitious and you will all have a different personality, coupled with very different personal circumstances. Your overall financial goals will also be very different, with a mixture of capital growth, growth and income, or even purely income. Remember that these change with time as your circumstances change.

  Married Woman - Husband and Child
Age 25
Dependants Husband and child
Wage Earner No
Risk profile : Low Small amounts invested when available in 'blue chip' stocks and shares. Buy and hold for the next 10-15 years.
Speculation None
  Single Woman - No immediate dependants
Age 35
Dependants None
Wage Earner Yes - medium income
Risk profile : Medium Regular monthly amounts invested in US DOW 30, S & P 500 shares - traded regularly and re-invested
Speculation Spread betting derivates for additional income
  Married Woman - all the children have left home
Age 55
Dependants Husband - has own income
Wage Earner Yes - high
Risk profile : High Regularly invests large sums in UK and US equities for capital growth and equity options for income in a few years time.
Speculation Trades currency to supplement pension and income for retirement.
   

Learn To Trade - Trader or Investor

This is not an easy definition to give, however you need to understand the principle difference between the two, as it will allow you not only to define your own strategy, but also to identify the difference when reading and studying books on the subject. In simple terms an investor  takes a longer term view of the market, and is more interested in the asset, its management, the fundamentals of the asset ( P & L, etc ) and the markets in which it delivers its products and services. A trader on the other hand is only interested in one thing - can the asset deliver a profit if I buy or sell it. Traders generally work on shorter timescales, and have little interest in analysing the asset in great detail- it is simply whether a trade can be executed which will be profitable. In other words, in which direction are prices moving in the short to medium term.

As you will see from the above, there is a substantial difference between an investor and a trader, and one question I am constantly asked is whether it is possible to be both at the same time - the answer is yes, of course. You may be investing in a portfolio for your longer term retirement, but speculating as a trader for shorter term gains. In a nutshell, a trader is really only interested in the money he or she can make from buying and selling something reasonably quickly. Once the money has been made ( or lost ) it's on to the next trade.

Let me give an example - as you know I trade currency which are traded as pairs. If I think a pair is going up I buy and if I think it going down I sell. I have little interest in the country, its people, its manufacturing output, GDP or anything else. (I would take note of any interest rate changes which could affect the overall direction, and some other factors ) but, I am simply looking to make money from a price movement.

Learn To Trade - Money Management

THIS IS THE MOST IMPORTANT CONCEPT THAT YOU WILL LEARN AND WHICH WILL DICTATE WHETHER YOU SUCCEED OR FAIL. BREAK THE RULES AND YOU WILL LOSE MONEY - I GUARANTEE IT!!!!! Let me give a simple example which I hope will explain everything, and why money management is so important. The preservation of trading capital is your number one priority - if you started with 10,000 and lost 50% leaving 5,000, you would have to increase this by 100% i.e. double what you have left, just to recover. This is almost impossible, and very unlikely particularly given the emotional turmoil you would now be in! The key to success is only to lose small amounts!!!

Learn To Trade - The Trading Emotions of Fear and Greed

All the markets throughout the world are driven by two basiconline stock trading traders emotions - the twin emotions of fear and greed. In a winning trade the greed overtakes all other emotions as you watch your 'paper profits' increase. You do not take your profit off the table but wait for still higher prices as greed drives your trading decision. Suddenly the market tumbles and you are now in loss. Fear sets in that your 'paper profits' have now become 'paper losses'. The situation gets worse, and you live in hope of a recovery in prices which never comes. Prices fall further still until you panic and sell. You are now trading purely on emotion and nothing else.( In the worst case the instrument goes to zero as you wait in hope of a recovery).

The markets are designed this way, so that the strong survive and the weak ( i.e. you ) perish. If you end up trading in the way I have described above ( and many people do ! ) you will not survive for long. This is why army training revolves around the simple principle of responding mechanically to commands and situations, even when under fire - all emotion has been removed.

In order to survive, you will need to remove as much emotion from your trading as possible, so that decisions are made for you based on pre-determined criteria that you have set up before you entered the trade. In other words before you go into battle! This simple tool is called a stop loss, and it does exactly what it says - it stops your losses! This simple mechanism has two benefits as follows :

1. It takes you out of a losing trade with no emotional input from you!

2. In doing so it preserves your capital, and does not allow small losses ( which are acceptable) to become big losses ( which are not!)

It is the simplest method available for preservation of your capital, and removal of emotion from the trade. Please don't worry about where or how you place it, I will explain this all later, when we cover money management in more detail later. Many years ago when I first started investing, I decided to buy some shares in a UK company called Marconi. I purchased a 1000 shares which at the time were trading at around 550p. The price moved up for a few days and I had a small profit, but the company was hit by a series of profit warnings. I watched in horror as the price first dropped to 300p and finally to below 100p. By this time I had convinced myself of two things - firstly the price would recover, and secondly that as they had fallen so far it was pointless to sell now as I had lost so much. The share was eventually suspended at 2p and I gave them to charity! PLEASE DO NOT LEARN THE HARD WAY - USE A STOP LOSS ON EVERY TRADE

Finally remember that trading is a business - a serious business. You will be trading against professionals who have been doing this for many years. The markets are not there for your benefit, they are there for you to provide money for the bigger players. No one will care if you lose your money - in fact no one will even know except you and your family. If you want excitement or an adrenalin rush go to the casino or play poker on line, You are in this to make money. Treat it as a business, treat you shares or other instruments as your inventory. Study, learn, practise, be patient, start small and consider every decision carefully. Practise good money management, understand yourself, be disciplined and never trade because you are bored, or for excitement. In running your business you will need to keep records of contract notes, fund transfers, dividend payments etc ( not least for tax purposes )

Now last and by no means least - please write a trading plan before you start any type of online trading. I receive more emails and questions about this than any other. It is a fundamental building block of your success. I have devoted an entire site to this aspect of trading ( follow the trading plan link here), and I have a page on this site which provides an outline to the reasons for, and how to write, a trading plan. So if you would like to learn to trade then read on, or follow one of my many trading sites and trading blogs which are update daily.

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