For some time now, I have wondered about writing a Beginners Guide to Trading. I’ve held off for a long time because there are plenty of places where you can find these kind of guides to getting started in trading, learning to trade profitably, guide to trading, and learning to trade Forex. However, nowhere of course is there an Armchair Trader Beginners Guide to Trading and I’ll definitely probably construct mine differently than the other guides to getting started in trading.
So, this is the Armchair Traders’ Beginners Guide to Trading. This isn’t specific to Forex, or Indices, or Equities, because for so much of those instruments, the basics remain the same anyway. So, it doesn’t matter whether you’re learning about trading forex or learning to spread bet – this is going to cover what you need to get started in trading.
Technical / Hardware Requirements for trading
Back in 2004 (suddenly, I feel old), I wrote a hardware trading guide for another website. That guide is now totally redundant because most any web-enabled device can facilitate trading and half of them fit in your pocket; the iPhone was still three years away when i wrote that, so things have changed rather a lot since then. Perhaps in 14 years I’ll be looking back at this and thinking the same.
If you’re trading Forex, you might want to run MT4 as a more ‘professional’ platform, but most CFD or Spread Bet brokers now provide platform access through your browser, so the tech requirements are largely diminished. Some professional Futures platforms such as Interactive Brokers‘ TWS or TradeStation, will require a desktop or laptop to run the software, and these are normally available for both PC and Mac, but these are now the exception rather than the rule.
You’ll also need a screen large enough to support several charts or windows open at once, but again most high-resolution widescreen monitors should be enough to get you started. My thoughts are that you should stick with your initial setup until your trading profits can afford to buy you a bigger screen, better graphics card etc. I largely gave up with Windows about twelve years ago, so all of my work is run on a 2012 MacBook Pro slaved to a 27″ Apple Cinema Display, but I also have a Windows 10 environment – a Mac Mini running Windows 10 Bootcamp – which is only ever used to run MT4 and is, hence, entirely anti-virus free and runs reasonably well given what’s under the bonnet.
How do I start learning to trade?
First of all, you should have a basic understanding of the market itself. The Forex market is a huge attraction these days due to the number of currency pairs available, market open times and number of brokers. The FX market is the biggest in the world, with trillions of dollars in volume traded daily. However, it is less tightly controlled than the Commodity market – mere billions a day – and there are many more Forex brokers out there than there are Futures brokers. It’s easy for FX brokers to offer access to major and minor currency pairs, along with currently popular products such as Cryptocurrency. However, Commodity brokers can only offer access to Futures products, although currency futures do exist through brokers like Interactive Brokers.
Centralised vs Decentralised Markets
When people talk about “the market”, they are not talking about one thing, as the market itself is several markets. For Futures and Stocks/Shares, the market is what’s known as centralised, that is to say that all market orders are transmitted to one central location with no other competing market. Prices that are available via a specific exchange are the only prices available. The NASDAQ and FTSE are examples of centralised markets. If you want to buy FTSE shares, you have to do it via the FTSE or via a Spread Betting brokers’ interpretation of the FTSE, at the very least. This is the same for buying S&P500 Futures, Eurostoxx or anything similar.
One example of a decentralised market would be Forex. This is where a multitude of connections exist to various large banks, small banks, liquidity providers and retail banks, enabling traders to buy and sell at the best prices without having to deal with one central party who controls everything. A second, very current and yet different example would be Cryptocurrency, where each and every market participant has a copy of the current ledger, or record of transactions, and can both exchange funds and provide verification that the other parties have sufficient funds to begin with.
Some would argue that a decentralised market is less open to manipulation by one or several parties, but I believe that all markets are able to be manipulated to some degree, be that by news, market participants, hedge funds, or any number of other parties with sufficient buying power to move the markets. You simply have to accept that trading is an inherently risky business where the market is going to do the unexpected.
You can’t go swimming in shark infested waters and not expect to get at least nibbled on from time to time.
There are other guides on the web which will lead you through massively overcomplicated versions of what the market, or markets are. From my perspective, the key is in the word; it’s a market. As such, there are two forces to consider: buyers and sellers.
These two quite literally make the market. Without one, the other cannot exist. If there are more buyers for something than there are sellers, demand increases and price goes with it. Less buyers means less demand, means lower prices.
For each position in the market, there must be both a buyer and a seller. If you are to open a position either long the market (i.e you believe the price will rise) or short the market (you believe the price will fall), then someone has to give you their existing position, i.e for you to buy someone must be selling and vice versa.
If there are plenty of both, this is good liquidity – the market must be liquid enough for you to get into and out of trades. A few years ago, this could be a problem, but it’s unlikely to be one now given the huge volume of trading that goes on on a daily basis, particularly in FX. You might, during volatile periods of trading (such as around news time), experience latency problems and slow fills, but this is often down to the platform / broker rather than a genuine lack of liquidity.
Features & Benefits to trading Forex, CFDs, Spread Betting and/or Futures & Options
- No commission on Forex and Spread Betting: brokers on these instruments are compensated through the ‘spread’, or the difference between the buy and the sell price. For example, to buy the market or ‘go long’, you might buy GBP/USD at 1.30010, and to sell it or ‘ go short’, you would sell at 1.30000. The price difference of 0.00010 is the brokers’ profit (spread) on each trade. Unlike Futures trading, there are no exchange fees or brokerage fees. When you close your position, your net profit / loss is shown on the screen. With Futures, you’ll often pay a nominal platform fee, a data fee, and a “round trip” (an open and close of one contract) commission to the broker of maybe $1 USD – but if you trade often enough your broker will normally waive all but the commission. With a large broker, commission fees are usually fixed and vary only by product/country, so personally I wouldn’t worry too much about the fees.
- No fixed lot size with FX: you can trade whatever size position you feel comfortable with, so if you’re starting off in trading, Forex is often a good place to start because you can (and should, given the recent ESMA changes) start small.
- Fixed contract sizes on shares, futures, options, CFDs. You’ll be trading at something like $5/point if you’re trading the e-mini Dow Jones or e-mini S&P500, which is not a good starting point for beginners because when you get it wrong (you will), it can be expensive real quick. 100 points against you on the YM? That’ll be $500 please, and that can happen in 5 minutes. Trust me, I’ve been there.
- Trade 24/7 with FX: Well, almost. The markets close briefly over the weekend due to the time differences in various counties, and out of “office hours” you will experience wider spreads, but you can trade 24/7 if you so choose, although it will be quiet over weekends, at least until the major Asian/Australian markets start to wake up on their Monday morning after closing on Friday evening.
- Leverage: this is both a good and a bad thing. Too much leverage means your pound or dollar buys you too much in the market, leaving you open to trading huge position sizes without really knowing it and hence over-exposure, all your money gone in a handful of trades (see also: Las Vegas, and how to blow your cash in 24 hours). The ESMA changes of summer 2018 have done something to alleviate this for traders in the EU, but outside of the EU those regulations do not apply. How does leverage work? Well, leverage of say 50:1 means that with a $500 account you can trade $25,000 work of FX. The lower the leverage, the lower the risk for traders. Futures brokers and Stock brokers, however, will not allow you to open positions or even open an account unless you have sufficient margin (deposit) requirements.
- Regulation: there are some brokers who are, ahem, “less regulated” than others. Brokers for FX and CFDs and Cryptocurrency exist all over the world, they do not have to be regulated in certain countries, and if they’re not regulated, guess what? They can do pretty much what they want with your money once you’ve given it to them, because no-one is going to force them to do anything else. My recommendation – trade with a UK-based FCA-regulated broker or a CySEC regulated broker. That way, you are guaranteed to get your money back if something goes wrong because your funds are segregated from the brokers’ funds, or if you just want out. By contrast to those unregulated brokers, Futures brokers are highly regulated by either the FCA, NFA, CFTC or any number of other national regulators.
All the above means that it is very very easy to get into trading Forex, and hence why it’s so popular because everyone believes it’s an easy thing to do and make money.
Trading is not easy. Over 90% of people will lose their money, fail at trading and quit. I have been there myself, several times. I’m profitable now – sometimes – but I have been trading on and off since 2002, when 56kbps dial-up connections were about as good as it got. You will never know the pain that comes from watching a 1MB image download slowly across your screen until you’ve experienced dial-up…
Paper trading / demo accounts
Soooo, this may be an unpopular view, possibly even controversial, but I’m not a believer in paper trading or demo accounts unless it’s just to learn the trading platform and how it works, which is generally a good idea.
Why don’t I believe in paper trading?
It’s a total waste of time. Try it. Open a demo account with any broker, and pull the trigger randomly on 10 trades, 100 trades, it matters not if they’re winners or losers. And therein lies the problem. It’s ever so easy to pull the trigger when there’s zero risk behind it, and you’ll find countless ‘successful traders’ around the web posting their demo account trades. It’s been happening for years. There used to be a guy who “traded” daily on a website I know well, and for years was posting advice and strategies, analysis and lord knows what else, and whilst I was learning I followed his advice. It wasn’t until about two years later I learned that he’d never placed so much as a single real trade, wasn’t a trader at all, just a wannabe trader, and all his analysis was done after it had already happened!!
You can make mistake after mistake with demo accounts and it’s immaterial. But what are you actually learning? I’d say not a lot, because trading is at least 50% a psychological battle with yourself and if you’re not trading with actual money, your own money – money that you can afford to lose – then in my view you may as well not bother.
Now, put £10k or £1k or £5k of your own money into that account and get hit with 10 losing trades on the trot.
Not so confident now, are you?
My advice? Open an account with a broker of your choosing – maybe even one of the ones we recommend – and trade with real money from the start. Sure, you’ll lose some. Might even win some. But trade with as small amounts as you possibly can, the absolute bare minimum that the broker will allow and do it until you’re profitable, and consider the cost to be the price of your education. Get used to seeing your trades set up, getting in and out of the market, and get used to pulling the trigger on good and bad trades – because there will be a lot some of both.
Technical or Fundamental trading
So, once you’ve decided which market(s) you want to trade, you’ve chosen a broker to use … now you have to decide how you’re going to trade them.
Are you a fundamental trader, who sits and analyses the markets before trading, or a purely technical trader, who believes that everything is already factored into the charts and the price? Or a combination of both?
As this is The Armchair Trader: Beginners Guide to Trading, my suggestion would be to say “be both” – that is, the person who looks at the news and the person who reads the charts. Why? Well, no matter what you’re trading, the news will make a difference. For example, you can’t trade currency pairs such as GBP/USD (that’s the British Pound vs the US Dollar rate) without knowing with absolutely certainty that, when there’s news such as US jobless claims, or the Bank of England changes the interest rate, that it’s not going to affect that particular currency pair. So, for your fundamental fix, use a news feed like RanSquawk or a trading app like Triggerbuddy to let you know when the news is coming out to the absolute minute – and pair that with an Economic Calendar from a broker like XTB. Be ready.
News trading can present interesting (read: volatile) opportunities for trading. Often with currencies, the price will rocket off in one direction at news time and then frequently – but not always – return to it’s pre-news price within an hour or so. Some strategies might involve straddling the pre-news price with a OCO (One Cancels Other) order and a pre-determined Limit (profit) point at news time, and then when price shoots off, you get filled either long or short and take a quick profit within seconds. And sometimes this works, sometimes it doesn’t. You have to be sitting there 2-3 minutes before the news is due, and get a feel for what the price is doing and how volatile it is before placing your orders, and you might find that the spread becomes wider around news time.
TA can be a bit subjective. In it’s simplest form, Technical Analysis involves looking at price charts and, based on price action and supply and demand, determining where you should buy a particular security and where you should sell it. Quite literally on top of that, there’s these things called Indicators, which you can overlay on a chart to provide additional information that may not be immediately apparent, such as average price over X period.
Don’t know anything about Price Charts and want to start with some basics? Try here.
In it’s more complex form, TA involves spotting chart patterns, based on the assumption that the markets are driven by people and events, and people’s reactions are predictable, and so price can be predicted, or so it goes. Of course, there’s more to it than that because if you spot a pattern on a chart and place your trades on the basis of that pattern, how do you know other traders have seen that pattern? Or maybe they have, but they’re fading it (going against it) because they don’t think it’ll happen, because last week they got their fingers burned by this very same pattern. You see where I’m going with this and the reason I said, not two paragraphs ago, that TA can be a bit subjective.
There are some elements of Technical Analysis that are less subjective than others. Price is one of them. Take a look at this chart below, it doesn’t matter that it’s from 1999. This chart is showing some basic Support and Resistance levels, which you can read more about here.
You can see here that price has pushed up several times and met resistance at around the 63 level. This is because this is where the buyers match the sellers. There simply aren’t enough people here to think the stock is worth more than 63. So, sellers come into the market and drive the price back down to 55. Then the buyers come back in, and back it goes to 63. And this happens several times over the course of mid-March 1999 to July 1999, price bouncing between resistance and support, until mid June 1999, when price takes a brief trip through to about 65. But why?
My personal take on this particular trade would be that a trader with a large position wanted to short the stock, so put a massive sell order in at 65 – but not before they’d bought a ton of stock to drive the price up. The short sellers would have had their stop loss order – that’s an order that automatically closes your position at a pre-determined price – in at a point just above the recent resistance of 63.
So, the price goes up to 65, the short sellers decide enough is enough, and they close their positions either manually or with the aid of stops – handing those shorts to the trader who wanted to sell at 65, and the same person (hedge fund, bank etc) who originally drove the price up to 65 in the first place.
This trader now owns a ton of stock at 65. Their massive sell order now pushes the market down to 58 within a few days, where it finds some temporary support again in the 56-60 price area. But its not enough. Price falls through the short-term low of 55 and sells off to 49 in early August, before slowly climbing back up to 55. And at this point, the previous support level of 55 has now become the new resistance, the new high, due to the volume of orders sitting there. And the same thing happens here at it did at 65. There’s a brief pip through the support-now-resistance level, but then – smelling blood – more short sellers come in, and before you know it, we’re down at 44. But not for long, because there’s a load of buy orders in around 46 (see the price action around that point in January and February?) and that pushes the price back up rapidly to 54.
Obviously, this is just my (historic) take on it, which might be right or might be wrong.
Trading is not about being right or wrong. It’s about hearing the cash register ring.
There are so many indicators these days that it would be an absolutely mammoth task to devote a section to covering those, and given that I’m not a fan and I’m the one writing this guide, I’m going to largely skip it. Sorry.
You could easily lay a 20-period moving average, or Bollinger Bands, or RSI, or MACD (these are all types of indicators) over any chart and make all sorts of pretty pictures and lines – but what would they tell you that you’ve not already seen in the price? As I’ve said elsewhere, I’m not an indicators fan (with the exception of volume), but they do have their place in some strategies, and a lot of people rely upon them for confirmation of what they’ve seen in price already. So, I can’t in all honesty say “Don’t use indicators” because this is a choice for you to make yourself, based on your experience.
They work for some people and not others.
In my view, moving averages, showing an average plot of price over the last X periods, are probably the most useful just to show you when price really is starting to change … but then you should be able to see that in the price anyway! Added to which, indicators take their data from price and/or volume, so why not just learn to watch price and volume and save the indicators. Anyway, each to their own. You’ll find something that works for you but just remember to take baby steps.
Now, this is a Beginners’ Guide to Trading, and we’ve covered quite a lot here on topics such as Hardware requirements, types of market available to start learning to trade, features and benefits of those types of market, Technical Analysis and more. I’ll post another article up shortly as a follow-up to this one and go into things in some additional detail.
Post any questions down below in Disqus and I’ll be happy to answer as best I can.