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Trading 101

Trading 101: 10 Essential Trading Rules for Rookies

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As we already stated, trading is more of an art than an exact science, but still, there are some rules that can help you in being consistently profitable despite the seemingly chaotic environment in financial markets. While some of the commandments below might be treated flexibly in certain cases, as a rookie, it’s best to follow them almost religiously. Why? Because the virtue of independence will come with experience in this field—and your experience will only build up if you stay in the game. These basic rules are vital for just that; assuring that you don’t make the mistakes that all too many traders already made.

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A great trader once said that for you to be successful you should lose all of your capital at least once. While this might be an exaggeration, it is true that learning to lose is an important skill in trading. That said, we are here to help you through those early, sometimes wild days of trading, by swiftly enhancing your skills and protecting you from the common errors of this profession.

Let’s dive into the most crucial rules!

1. Don’t hold positions that keep you up at night

In other words, mind the size of your positions. To be honest, this rule is probably THE rule of new traders. There are probably no traders out there who lost all of their capital by losing 50 trades in a row that cost 2% of the value of their portfolio, but there are thousands and thousands who blew away their account with 2 trades that took 50% of their capital. This is an easy filter— if you are excited about a position and you feel the urge to check it every hour, then there is a good chance that it’s too large.

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2. Get rid of your losers and let your winners run

This might sound obvious and easy, but believe us, the best way to spot successful traders is to look for green “Open Positions” tabs. Of course, from time to time you will have losers that stay open for a while (not hitting the stop-loss) but in general, your open positions should be winners.

3. Focus on the performance of your strategy not individual positions

Your success as a trader, in the long run, will be mostly determined by two things: the quality of your strategies and your risk management skills. Any single position will only be a small part of your long-term statistics. That said, experienced traders make concentrated bets all the time, but starting with large positions as a beginner is like trying to run a marathon after one training—it might work, but most likely it won’t be pretty. When you start trading, don’t look for “The Trade of Your Life” that will make you rich; it will lead to oversized positions and way too difficult decisions.

4. Trade in the direction of the prevailing trend

We already mentioned this rule in our previous articles, but it’s worth repeating; the best way to start trading is to trade when the trends on different time-frames align in one direction. Leave the reversal trades for later, when you are already confident in your strategies, risk management practices, and, above all, yourself.

5. Try to stay in trends as long as possible

Staying in a winner has the opposite effect than sticking with a loser; you become more confident, you will be making decisions easier, and what’s more, you are likely to stay in a trend that goes on for longer than you’d have expected. If a position keeps on delivering, the best thing to do is trying to stay in t while it lasts. A great way to achieve that is to take a part of your profits and leave a small position on the table. This way you can set a wider, trailing stop-loss (as your drawdown will be smaller) and, in a sense, “forget about” the position.

6. Don’t try to rationalize staying in losers

This relates closely to the previous rule, but it’s a very important one. In several cases, you will feel the urge to stay in a position that is getting near to your stop-loss level. What’s worse you will inevitably get into situations when the asset hits your stop-loss, just to turn back and hit your target without you. These situations will hurt your ego and make you regret following your strategy, but this is a dangerous road, and it can lead to serious losses. This doesn’t mean that you shouldn’t revise your strategies if this happens too often – maybe your stop levels are too narrow, and you should consider smaller positions – but the wrong answer is to start moving your stop-loss order because “it will come back”. This is just one of many ways to “escape” from taking a loss, but usually, they all serve one purpose: to protect your ego.

7. Never double down on losers

Another dangerous way of dealing with losers is to double down on them, buying more at lower prices or shorting more higher. This usually goes hand-in-hand with the excuse of “it’s now a long-term position”. While this can work once, twice, or several times, that just makes it even more dangerous. There will inevitably be a time when it won’t work, and it will be way harder to take a much larger loss. Even great traders can be caught in these kinds of situations, where they will simply lose their discipline and double down again, and again… Don’t be one of them!

8. Start trading with capital that you won’t need for at least a year

People mostly invest and trade to grow capital, to have another source of income, and eventually to be financially independent. As a beginner, planning on trading for a living is like trying any other profession without learning the skills required. Also, counting on instant profits from trading, or even worse relying on those profits, will put you under immense pressure. That pressure could very well be a game changer when learning the peculiarities of trading. If you follow this rule, you will be able to make decisions with relative ease, while being less exposed to markets when you are the most vulnerable. As you grow your savings and get more experienced, your invested capital will naturally grow together with your skills. This way, the mechanics of compounded returns will work in your favor.

9. Start trading with assets that you understand

Have you heard about time decay? No? Then probably you should avoid options trading. Does delivery date ring a bell? No? Futures might be tricky for you; you could even end up with a few barrels of crude oil. Jokes aside, this is a very important rule, as all financial markets have opportunities and traps that are essential for traders. Be sure to know the basic rules of trading, the commissions, spreads and other costs, the trading units, and the special features of your asset of choice before putting real money on the table. Demo accounts are great tools for getting acquainted with the different asset classes.

10. Don’t start your trading career with day-trading

A lot of new traders get lured by day-trading on forex markets, and lately binary options markets, because it’s easy to start trading in those markets, and after all day-trading seems exciting. But if you think about it, day-trading requires potentially tough decisions several times a day, and a beginner is much more likely to make bad choices, especially under pressure. Wouldn’t it make more sense to start with maybe only a few decisions a week before diving into the furiously fast world of intraday positions? We suggest that until you are not familiar with, at least, one asset class, while also having some experience in trading, DON’T start day-trading.

Following these general rules won’t be enough to transform you into a successful trader instantly, but they will help you in staying on the right track, while avoiding some of the biggest traps of this exciting profession. With these rules in mind, you will be free to experiment with different asset classes and strategies until you find the most suitable ones for you.

As you already know, investing is fundamentally different from trading, so next time we will go through the essential rules of long-term value investing.

Previous article: Trend Analysis with Basic Charting Tools

Next article: Charting Tools I: Support and Resistance Levels

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 115 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Trading 101

A Long-term Investment Strategy with the 200-Day Moving Average

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Moving average

If you are looking for a way to be invested in the stock market during good times, but at the same time have some protection in place for when the next crisis hits, then look no further. Trend-following strategies should then be your friend, and I will here share a simple yet very effective such strategy designed for long-term capital growth with low volatility.

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Aside from my crypto investments, I have long been looking for a low-maintenance investment strategy for the stock market. As I don’t have much time for short-term trading anymore, I am mainly looking to make long-term investments that I can simply buy and forget about.

However, I still want to be protected in case we hit another crisis or enter into a larger bear market. In my opinion, there are lots of risks on the horizon for the financial market. Still, a bull market is a bull market and any good trend-following investor should be invested in it regardless of his own feelings or opinions about where the market should be heading.

The 200-day moving average

The 200-day moving average is one of the most used technical indicators out there, and possibly the most popular moving average, particularly among US stock market investors.

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Because of its popularity, as well as being featured in the media whenever the market crosses it, it works in many ways as a self-fulfilling prophecy. The 200-day moving average has also been in the headlines over the last few weeks after the plunge we saw in global stock markets in the beginning of February. The line then acted as support for the S&P, but a break below it would have been a significant event that many investors would take as the beginning of a larger bear market.

To illustrate this point, let’s take a look at the table below from Bloomberg. It shows six bear markets where losses exceed 20%, broken down by the loss before the market came down through the 200-day moving average and after it crossed the line.

200-day moving average

The question now becomes if you can use the 200-day moving average as an indicator to follow in your own trading. You would buy when the market closes above the 200-day moving average and sell when it closes below.

The answer to that is that it definitely could be used to ensure you stay invested during prolonged bull markets, while avoiding deep corrections and market crashes. However, a problem with all trend-following strategies is what’s known as whipsaws – those times when the trend appears to start in one direction just as it turns again into the opposite direction. This is what kills the profitability of most trend-following trading systems.

Dealing with whipsaws

One strategy for overcoming the problem with whipsaws is to wait a certain number of days after the moving average line has been crossed before you enter your trade. This way, you would filter out a lot of the choppy price movements during times when the market is not showing any clear direction.

For example, one strategy that often is proposed is to buy only when the market has closed above the 200-day moving average line for 5 consecutive days. Similarly, you would sell when the market has closed below the same line for 5 consecutive days. 5 days seems to be a popular choice as it filters out most of the choppy price movements that are happening right around the moving average line.

Depending on what market you test this strategy on, you may find that the absolute returns would have been higher with a simple buy-and-hold system. However, pay attention to what happened during market crashes like the one we had in 2008. If you apply it to the SPY ETF (the ETF that tracks the S&P500), you will see that the strategy then went to cash and you would have been protected against further downside. In addition, keep in mind that nobody knows how deep the next crash will be, all we know is that sooner or later it will come.

Personally, I would rather sacrifice a little bit of my returns for an insurance against a completely unknown risk to the downside. In my view, this strategy is perfect for long-term capital growth while keeping volatility very low and giving peace of mind to the investor during times of market turmoil.

Featured image from Pixabay.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.2 stars on average, based on 21 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He mainly follows the stock and forex markets, and is always looking for the next great alternative investment opportunity.




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Trading 101

How to Find Good Swing Trading Set-Ups

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swing trading

Swing trading is often the starting point for those who are looking to venture into trading, and perhaps make the move from being an investor to becoming an active trader. The reasons for this are simple; it involves trading on a medium timeframe which means it is possible to do it while you still have a day job, and it can complement other trading styles like day trading, trend trading, or scalping.

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According to Investopdia, typical holding time for a swing trader is 1-4 days. In forex, we would typically hold our trade for no more than 5 days in order to eliminate the risk of holding a position while the markets are closed over the weekend. For cryptocurrencies however, which trade 24/7, we can adapt our rules and we no longer need to be so strict about the holding period. In crypto, as long as the conditions for holding the trade are still valid, we should hold on to it.

What is a swing in a market?

The market price of a cryptocurrency can be defined as the equilibrium between supply and demand at any given time. It is the price where a buyer and a seller agree to make a trade. Over time, these equilibrium prices can move in uptrends or downtrends or even sideways in a range.

A typical market pattern is for prices to move from contracting ranges to expanding ranges. The shift between these two is called a “break-out,” and this is where we see strong and quick price movements to a new area on the chart.

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One way to look at it is to compare range contraction to a spring that is being compressed. The break-out occurs when all the energy from the spring is released, which may happen either to the upside or the downside. We now have the beginning of a “swing” in the market.

If this break-out is followed by a series of higher tops and higher bottoms in “wave movements,” the market has formed an uptrend. If the inverse is true, we have a downtrend. Each wave is considered its own swing in the market.

As swing traders, our job is to catch the most violent part of this move – the break-out. Some traders choose to hold on to the trade through several swings and thus ride the trend, while others prefer to sell once a pre-determined price target has been reached.

How to spot good potential swings?

For the majority of the time, prices of any tradable instrument move within a certain range. In the stock market, it is often said that the market is ranging as much as 80% of the time.

To scan for potential trading opportunities, one approach is to first look at your charts in one of the higher timeframes, for example the daily or the 4-hour timeframe. Once you spot a promising set-up, switch to a lower timeframe like the 1-hour to look for specific entry opportunities.

Generally speaking, there are three important factors you need to take into consideration when looking for an entry as a swing trader:

  1. Swings should happen in the same general direction as the trend that is playing out on the higher timeframes.
  2. If trading crypto, look for momentum in coins that share similar characteristics as the one you are trading. For example, if you are considering to trade a privacy-oriented coin like Dash, how are other privacy coins like Monero or Zcash doing? In the stock market, look for stocks in the same industry.
  3. Carefully evaluate the trend. Is it getting stronger or weaker? A weakening trend could mean that it is about to change direction, while a strengthening trend could mean the opposite. Is trading volume supporting the trend? Uptrends with gradually increasing volume are considered the most robust.

Timing and win rate

The best instrument to trade is the one that is exhibiting the strongest behavior in its class. So, to use the privacy coins as an example again, pick the one that is trending up in the strongest way among them. This is the coin where you want to place your trade.

In addition to this, don’t forget to adjust and tweak your strategy to the prevailing market conditions. Remember that the win rate of any trading strategy can change dramatically under changing market conditions, and make you go from being a profitable trader to a losing trader.

As swing traders, we need to be aggressive when we spot good opportunities. You cannot afford to pass on good trading opportunities. Make sure that you earn enough on your good trades to make up for the inevitable losses that will come.

Similarly, a swing trader also need to know when to stay away from the market altogether. It is equally important to recognize the conditions you should stay away from, as it is to be aggressive under the right conditions.

Lastly, remember the words of the legendary trader Jesse Livermore: “There is a time to go long, a time to go short, and a time to go fishing.” These are wise words that we all should remind ourselves of from time to time.

Good luck on your swing trading journey.

Featured image from Pixabay.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.2 stars on average, based on 21 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He mainly follows the stock and forex markets, and is always looking for the next great alternative investment opportunity.




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Jonas Borchgrevink

A New Trading Strategy? Using RSI and Stoch to find Entry Points

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I started my CFD Journey on Thursday using a few rules that I created for myself. I’m now interested in trying to see if I can use RSI and Stoch in combination to create an even better trading strategy for myself. My previous rules were:

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  1. Only risk max 2% of my bank roll per trade.
  2. Have 0 active positions during the night (first of all, I lose sleep, second; you are charged an interest fee for leaving a leveraged product overnight.)
  3. Always trade on last month’s trend including the previous day(s). If they do not correlate, I will not trade.
  4. If one position is lost, I’ll double the amount (martingale) and do a second trade. I’ll only stop doubling after 3 consecutive losses.
  5. Do not think about lost trade opportunities.
  6. Markets to trade: Dax & Dow (minimum spread).
  7. Stay updated on economic releases prior to entering a trade.
  8. Do not have emotional ties to the money. I like to call them “points”.

Trend following has proven (historically) to be the most sound way to trade any asset. It’s indisputable. However, for CFD trading I never want to leave a trade overnight due to interest fees and sleep. It can be hard to do trend following when you have to be in and out of a trade quick. I got an idea today to try and use RSI and Stoch in combination to find the best entry points for my CFD trading. And my ultimate strategy would be to include it with my number 3 rule:

Always trade on last month’s trend including the previous day(s). If they do not correlate, I will not trade.

In combination with my new RSI and Stoch rule:

Only enter a position when an asset is overbought or oversold shown by both RSI & Stoch at the same time.

What is RSI and Stoch?

The relative strength index (RSI) is a momentum indicator developed by noted technical analyst Welles Wilder, that compares the magnitude of recent gains and losses over a specified time period to measure speed and change of price movements of a security. It is primarily used to attempt to identify overbought or oversold conditions in the trading of an asset.

Many say that an asset with an RSI above 70 is overbought (and should be sold) or if the RSI is below 30 it’s oversold (and should be bought).

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The stochastic oscillator is a momentum indicator comparing the closing price of a security to the range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result.

Asset with a stoch showing above 80 is considered overbought, and if the asset is showing less than 20 it’s considered oversold.

My mini experiment with the Dax 30 Minute Timeframe

Below is the first crossover I found where RSI and Stoch is correlating going back a few days on the Dax index. Both give a buy signal when the indicators cross their lowest horizontal lines. Then I found out that if I were to sell when either one of the indicators crosses the overbought territory I would be able to Take Profit.

Looking at the Dax index back to January 17th, I would have won six trades and lost two trades based on this strategy alone (RSI and Stoch with a 30 min timeframe). If I were to implement it with my trade following rule, I would have initiated 0 trades during this period (where both the intraday trend and the monthly trend is correlating.) I’m not sure if I’m going to follow these rules by the book, but I’m definitely going to experiment with them the following week and give you an update in my posts.

Have you tried this before? Submit a comment below and let me know how it worked for you.

My trading rules are now updated to:

  1. Only risk max 2% of my bank roll per trade.
  2. Have 0 active positions during the night (first of all, I lose sleep, second; you are charged an interest fee for leaving a leveraged product overnight.)
  3. Always trade on last month’s trend including the previous day(s). If they do not correlate, I will not trade.
  4. If one position is lost, I’ll double the amount (martingale) and do a second trade. I’ll only stop doubling after 3 consecutive losses.
  5. Do not think about lost trade opportunities.
  6. Markets to trade: Dax & Dow (minimum spread).
  7. Stay updated on economic releases prior to entering a trade.
  8. Do not have emotional ties to the money. I like to call them “points”.
  9. Only enter a position when an asset is overbought or oversold shown by both RSI & Stoch at the same time.
Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.2 stars on average, based on 50 rated postsFounder of Hacked.com and CryptoCoinsNews




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