Where Are You?
Look around you, what you see? If you are in the place from which you do your trading, I hope for your sake that you do not see a cluttered space filled with distractions. It is easy to think that, because you can trade from home, you don’t need to arrange your workstation in a businesslike manner.
This sets you off on the wrong foot. If you want to make trading your business, then you should treat it like a business and act accordingly. That means getting rid of the trash around your computer and adopting a clean workspace, with room to lay out notes, articles, and your trading journal. Your trading account will thank you!
Keep a Note
It always surprises me how many people do not keep a note of the trades that they do, but instead rely on their brokers statements to remind them. It is an excellent discipline to keep a diary in which you not only detail the trades you make, but the reasons for making them and your feelings at the time.
Yes, it feels awkward and takes time at the start, but it will soon become second nature and your notes will prove invaluable in going back and seeing where you could improve your trading plan. But try to wait at least a day after a losing trade before critiquing it, otherwise the emotion will still color your view.
Here are a few basic tips I’ve learned so far:
Start small, start very very small! It may not be exciting making a few pounds profit on a good trade, but its far better to lose ony a few pounds on a bad trade! Only go to larger trades when you can consistently make a profit. Build up your skills, strategies and confidence before going up a gear.
Watch the Spread! Spread trading providers don’t charge commissions but there are still dealing costs involved. In particular they will always offer you a wider bid-offer spread than what is available in the cash market. For instance, on Gold futures the bid offer may normally be $0.10 or $789 bid and £789.10 offered. However, the spread betting provider will normally quote you a $0.50 οr $788.80 – £789.30 spread. At first glance this may not appear like a lot but these costs can have a dramatic effect on your profitability over a period of time especially more so if you tend to make a lot of trades.
Have a trading plan – Plan your trades to ensure a disciplined approach. Don’t just have a plan; write it down, adjust it if it doesn’t work, or can be improved, but stick to your rules. And make sure that your system has a good risk/reward ratio. Importantly, don’t bet on tips or whims, don’t gamble.
Use Charts but Don’t Complicate your Analysis! – Whether you believe or not in technical analysis is not important as the fact that 80% of market participants follow them which means that you cannot ignore them. Trade with the trend and not against it. Things to watch out for include major key resistance and support levels such as the 50 or 200 day moving averages as well as price breakouts. However, don’t over complicate matters – the average person now has access to sophisticated charting with numerous different technical indicators and the use of these technical indicators has massively diluted over the year. Instead, it would make better sense to focus on the shape of a chart on different time horizons. In particular does the chart look bullish or bearish? Are there any key levels of support or resistance approaching? If so, study how the market reacts when it reaches these key levels as this can give hints as to the future direction. Do not try to chase a market – be patient; there will always be good trading opportunities in the future.
Don’t Be Worried about using Spreadbets for Holding Longer Term Positions – We often hear that spread trading isn’t cost effective for holding out longer term positions but the reality is that with today’s very low interest rates, the costs of holding a position have been sharply reduced and it may cost you less than 5% over the course of a year (in financing costs) to hold a spreadbet for a full year. In fact, taking a longer trading timeframe is often a good idea as it gives you more time for your trade to be right and you don’t end up having to following the markets constantly.
Use Demo Accounts When First Starting Out – Most of the spread trading providers nowadays offer simulator accounts that are useful to familiarise yourself with the different spread betting markets and the workings of the trading platform. Demo accounts are also great for general practice and also to test a spread betting system. Do note, however, that trading with ‘dummy funds’ is a different thing to utilising ‘real funds’ – the psychology just isn’t there (the emotions like greed and fear are missing from the trading element) and trading with demo funds won’t expose your trading weaknesses. After a month or so, try depositing a few thousands into your spread betting account and trade small positions. Once you start to acquire more confidence in your own abilities to trade successfully, start to gradually (but slowly) increasing stakes until you to your intended trade size.
Don’t Trade Unfamiliar Markets – Don’t trade markets you aren’t familiar with or companies which businesses you don’t understand. For instance, commodities are a classic where weather and shortages can play a major hand and sharply affect their prices. My biggest losses has been by far in oilers and miners. I made a huge amount on an oiler and then lost it all and more, I kept going back to the same share (revenge), I should have just deleted it off the watchlist/monitor. The chart was so awful as well. What the f*** was I doing? So if you want to deal in these markets make sure you are fully informed and study historical charts to get an idea of the price fluctuations before delving in. And make sure to monitor your margin so you do not end up getting stopped out.
Always, Always, Always use a stop loss. Risk management is the key, so always consider a stop loss and make sure you do everything to help preserve your trading capital. Trading without a stop loss is financial suicide. If you dont use a stop, then just imagine if you were trading Marconi, Enron, or Northern Rock when their share value fell to the floor! (- A ‘guaranteed’ stop is recommended for full security). Do not run your losses, cut them early if the market moves against you.
Only ever trade with money you can afford to lose. Of course we all hope you don’t lose the money but you cannot risk money you need for the rent, holiday, car, food, etc etc.