Ways to improve your trading (Beginners)

1/1/2014

Ways to improve your trading (Beginners) By Chan Jia He, Senior Analyst

NUS Students’ Investment Society NATIONAL UNIVERSITY OF SINGAPORE

Introduction More often than not, many individuals who are interested in trading are at a loss of how to begin or improve their trading. Some just jump right into real trading without any prior knowledge while others spend hundreds of hours reading trading books without ever executing a real trade. In this article, I hope to provide some ways to help a beginner improve his/her trading as well as bring up some pointers to keep in mind so that you can have a smoother trading journey.

Always Start with a Demo Account When you are just starting out, you certainly do not want to put in your cold hard cash to ‘just try out trading’. Start with a demo account first to get a feel of trading. Yes, you may have read up a lot about trading through books or websites, but it is likely that trading itself is very different from reading about trading. So for those just starting out, it is important to always begin with a demo account and put any strategies that you’ve read up on or heard about into practice. Chances are, it will be a lot harder than what it seems like on the book or article you’ve read. Take your time and perfect your trading strategy and style. But most importantly, embrace the uncertainty of trading real time. There will be times where you see a perfect set up for a trade and it doesn’t go your way even though the book you’ve read has listed a dozen of examples of successful trades using that perfect set up. Start slow, and take one step at a time. There are many different brokers out there. Google it and you will be able to find more than a dozen brokers. Since no forms of advertising are allowed, I will not be listing any brokers in this article. But you should have no problems finding one with the help of Google in the 21st century. Keep trading on a demo account before you move on to real money. There is no fix amount of period that you must trade using a demo. Some traders trade on demo for as short as a month, others trade for as long as a year. The thing to note is that you should only move on to real money when you are confident enough in yourself with regards to your strategy and controlling your emotions when trading. The thing about trading on a demo account is that you do not feel the pain when you lose money. After all, it is just virtual money. But, as much as possible, try to imagine it as your own money and trade it as if it is your cold hard cash.

Then Move on to a Small Live Account Once you’ve obtained a certain level of confidence, do move on to a live account. After all, as mentioned above, demo account does not involve real money. Demo accounts can only help to simulate real trading to a certain extent. And silly mistakes, like chasing the market and holding on to losing positions when everything tells you the opposite (because you do not want to realize the loss) are not ‘punished’ since you only ‘lose’ virtual money. Some have gone as far to say that one can only truly learn from their mistake only when they lose their own money.

So this is where a real account can really help a trader improve. In the initial stage, put in only a small amount of money (approximately $500). I must emphasize the word ‘small’, because you do not want to incur so much losses that it turns you off from trading. Even if you are very confident, and have seen great success while trading your demo account, always start with a small amount first. Why? Because the psychology and emotions when trading real money is very different from trading a demo account. You might have treated your demo account like it was your real money, but subconsciously you know that if you ‘lose’ money in the demo account, you actually lose nothing. But when it comes to trading a real account, you know what is at stake – your hard-earned money, or your parents’ hard earned cash for some of you. It is real money and whether you like it or not, it is going to affect your judgment and calls when it comes to trading. So by starting small, it will provide you with a perfect platform to experience trading with real money, and at the same time, provide you with limited downside if you commit silly mistakes or make a wrong call on a trade. Once you feel that you are ready to increase your lot size after trading with a small amount of real money, you are free to top up your account to a size which you are more comfortable with.

Keep a Trading Journal Whether you are trading demo or a real account, it is always beneficial to keep a trading journal. A trading journal allows you to review your trades, on a weekly or monthly basis, so that you can learn from every single trade you make. Therefore, it is best to take a screenshot of the chart after you entered a trade so that you do not have to scroll back your charts when you feel like reviewing your trade (which can be really hard to find, especially if you are trading on the lower timeframes like 1minute). In addition, it would be good to include your reasons for entering a trade, risk-reward, and of course the end-result of the trade. Below is a trading journal template that you can take reference from.

Do take note that there are no fix formats for a trading journal. Ultimately, the purpose of having one is to help facilitate your learning from previous good trades and past mistakes so that eventually, you can consistently repeat what you have done right and avoid the things that you’ve done wrongly. Hence, if you update your trading journal on a consistent basis, it can definitely provide you with a platform to learn from past mistakes and repeat those good practices, which will ultimately help improve your trading.

Always Put a Stop Loss Even though having a stop loss is regarded as one of the most basic rules in trading, some traders tend to ignore that rule as they advance further in their trading journey. As you become more successful and become better in your analysis, you tend to believe in yourself more (which is not a bad thing). However, it becomes bad when you start to neglect the basic rules and start trading without any stop loss. Even if you are very certain of your trade, you should still have a stop loss. Why? Well, to quote John Maynard Keynes, the market can remain irrational longer than you can remain solvent. Your trade idea might be right, but if the market is irrational and do not go in the direction of your trade, you will still lose money. So remember to always put a stop loss because it doesn’t matter if you are right because it would mean nothing if you bust your account due to an over-conviction in your own trade idea. Yes, price might hit your stop loss before moving in the direction of your trade which, more often than not, would make you want to pull your hair out. But instead of lamenting, you can view it as an opportunity to learn. Did you put a stop loss that is too tight? Perhaps you could have wait for prices to retrace more before entering? Remember, there are always things to learn from the market everyday every time.

Controlling the ‘Trader’s Itch’ There will be times where you would be tempted to make a trade, even if there are no perfect setups simply, because it has been some time since you had a position. This is known as the ‘trader’s itch’ and is not uncommon among traders. More often than not, most of these trades end badly for the trader. For a student like myself, I would often try to stay away from trading during examination period so that I can fully concentrate on my revision. However, there are times during the examination period where I will open my MT4 and have an urge to take up a position even if a perfect setup is not present. Almost all of these trades ended up badly and it has only taught me one think – never trade when your fingers are itchy; only do so when there is a perfect setup and after you’ve made a thorough analysis. To solve the issue of the ‘trader’s itch’, I would recommend withdrawing all the money from your account during the period in which you do not want to trade. Most brokers would charge a fee of 3% of the amount transferred whenever you deposit/withdraw money into/from your account. Though some might feel that it is a fairly substantial amount of money, I would like to point out that this 3% is likely to be less than the money you will lose from trades resulting from having itchy fingers. So in the event where you find yourself losing a considerable amount of money due to trades arising from itchy fingers,

do give this recommendation a try! Chances are, withdrawing everything from your account will help curb your urge to take up a position in the market when your fingers are feeling itchy, and would help you to preserve your money more effectively than you will ever expect.

Read More Books It is also important for traders to read up as much as possible to learn from as much as possible from famous and successful traders. Below is a list of possible books that are recommended by Yahoo Finance: 1. Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders (Curtis M. Faith) 2. Market Wizards: Interviews With Top Traders (Jack D. Schwager) 3. The Big Short: Inside the Doomsday Machine (Michael Lewis) 4. Secrets for Profiting in Bull and Bear Markets (Stan Weinstein) 5. Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications (John Murphy) 6. The Art of Short Selling (Kathryn F. Staley) 7. Trader Vic II: Principles of Professional Speculation (Victor Sperandeo) 8. Elliott Wave Principle: Key to Market Behavior (A.J. Frost; Robert R. Prechter) 9. The Day They Shook the Plum Tree (Arthur H. Lewis) 10. Reminiscences of a Stock Operator (Edwin Lefèvre) I think there is no need to list the benefits of reading; it’s pretty obvious I presume.

Keep Up with Market News And of course, besides books, do keep up with market news as well by reading financial news on a consistent basis. Below is a list of websites/newspaper which you can browse to keep up with general financial news. 1. Wall Street Journal (there are always free copies of it every day outside BBA Office in MRB. Alternatively, you can subscribe to it and pay a monthly fee) 2. Bloomberg.com 3. Marketwatch.com 4. Reuters.com

Conclusion This article is actually a very general guide for beginners who are looking for ways to improve their trading and I hope that this article has provided you with some useful ways to do so. Remember, trading is a long and tough journey. Effort and time are definitely needed before one can be successful. But if you follow these steps and read up consistently, you are certainly one step closer to your ultimate aim of being a successful trader. Good luck and happy trading!

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