Starting out trading can seem like a daunting and complicated process. We’ve put together a few hints and tips to help get you started.
- Research
Before you get started on your trading journey make sure you understand how spread betting works. Take the time to do the necessary research to learn about trading a leveraged product, using margin and the risks involved..
Once you understand the product you are trading, you should familiarise yourself with different trading styles and strategies and start to think about which might be the most suitable for you. How much time can you dedicate to trading? Do you want to be a position trader, swing trader or a day trader?
Part of your research should also be into the different markets. Do you want to trade stocks, indices, commodities, forex, bonds or cryptocurrencies? Know what moves your market and or which levels are important. These are all questions and areas that you need to think about and research before you start trading.
- Trading plan
In order to be a successful trader, it is essential that you have a trading plan. Think of it like a business plan but for trading. It is a written document outlining your approach to trading and the rules that you will abide by. You wouldn’t start a business without a business plan, and you shouldn’t start trading without a trading plan.
A trading plan will help you identify your trading goals and how to achieve them. This written document should include:
What type of trader you will be?
How much capital will you invest?
How often will you trade?
What markets will you trade?
The strategy that you will use to enter and exit trades?
Your approach to risk management?
How will you evaluate your trading?
A trading plan can help make the trading process more of a tick box exercise and therefore less emotional. The less emotion involved in your trading the more chances that you have of being a profitable trader.
- Risk Management
Trading on margin can be risky. Losses can quickly stack up on an account if no risk management strategy is implemented. A risk management strategy will look at, among other things, how to protect your trade should the market move against you. This could involve the use of stop losses.
A stop loss is an order to close your position in the case that the market moves against you. For example, if you enter a buy trade on EUR/USD at 1.1250 and put a stop loss at 1.1150. Should the market price drop to 1.1150 then your trade will close out. It will close at the first available price at or after $1.1150 depending on whether there is any gapping in the market.
A guaranteed stop is a stop loss that guarantees that no matter what, that your trade will be closed out at the price you specify. You pay a small premium for a guaranteed stop loss.
- Start small
When you begin trading it is best to keep it manageable. Start with one or two markets on your watchlist that you watch closely and that you become very familiar with. This way you can quickly learn price patterns, levels that the market respects and what causes that market to move.
In addition to keeping your watchlist limited, also keep your trade size manageable, particularly at the beginning. You will quickly realise that the size of your trade can affect how you react to that trade emotionally. The larger the trade, the larger the risk and the more effort it will take to control your emotions whilst running that trade. When you are starting out and trying to rein those emotions in, you will often find that with a smaller position size, it’s easier to keep your emotions in check. At LCG we offer our clients the possibility of trading from a minimum of 50p per point on some markets. Check out trade size minimums here.
- Risk Reward Ratio
It is not possible to win every trade. In fact, a strategy doesn’t even need to win every time in order to be profitable. The number of times that you win a trade compared to losing a trade is called your win ratio. Most traders will only win 50% – 60% of the time. The key here is to make sure that you win more than what you are prepared to lose. Here we are looking at the risk to reward ratio. If you are prepared to put your profit taker 50 points higher and a stop loss 50 points lower your risk reward ratio is 1:1. In order to give your account a chance of turning a profit only enter trades when there is a potential 1:2 risk to reward ratio. In other words a trade is only worth taking if the potential profit is double that of the potential loss. This way, even if you only win 50% of the time, your account will be more likely to turn a profit
- Practice, Practice, Practise
Using a demo account before you start training on a real account can be an invaluable experience. A demo account enables you to practise trading using fake money. By using a demo account, you can put into practise everything that you have learnt before you start trading with real money. You can test out entry and exit strategies, get to know different markets and experience first-hand how different markets react to particular data releases.
Whilst demo accounts are extremely useful, don’t spend too long on them. It is important to realise that trading with real money is a different experience psychologically than trading a demo account. Emotions are much stronger when trading a live account and this could mean that your behaviour changes once you move to a real account or that you are more prepared to take bigger risks on a demo account. Therefore, be aware that a demo account comes with many advantages but be conscious that you will continue learning on a real account.
- Don’t overtrade
Whilst this is the simplest rule, it is often the most challenging to follow. Overtrading is without a doubt the most prevalent trading maitake that traders make. This is an extremely destructive emotional trading problem. If you are overtrading it almost always means that you are not sticking to your trading plan. Stick to your plan religiously to avoid trading those positions aren’t exactly as your plan dictates your trade set up should be. Sometimes spending too long In front of the charts can lead to overtrading. If you know that this reflects your behaviour, then following a “set and forget” rule for orders can be useful. Here you would set the orders up and then literally walk away.
Trading is by no means easy. It takes time and patience to ride the steep learning curve. These tips should at least help you set out in the right direction.
