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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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4.6 stars on average, based on 257 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

Managing the Safety of Your Cryptocurrency

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The fact that Coinbase and other companies have made it possible for nearly anyone to invest in cryptocurrencies is almost unilaterally a good thing, but it has led to many people buying cryptocurrencies without understanding the ecosystem. Bitcoin and other cryptocurrencies are only seen as risky investments because of their future worth, when there is also the risk of theft in the present.

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Many investors focus their time on the idea of maximizing the returns on their investments, but protection against downside is equally important. We’ve all heard the oft-cited thought experiment where when you lose 50% of your investment, you now need 100% returns to get back to even. Avoiding negative returns is an equal priority to achieving high ones.

There are some steps a newbie cryptocurrency investor can take to make sure they are as protected as they can be. From wallets to basic security and diversification, the points below are a few quick changes you can make that will maximize your security.

The Basics

The two most basic steps are not keeping your money in an exchange wallet, and using a 2-factor authentication application. Many people new to the ecosystem will go with the path of least resistance, and that results in only having a password protecting their assets.

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Exchanges are considered to be secure, but there have been many breaches in the past, so it is not impossible your funds could be compromised in the future. In the case of a hack, hopefully your exchange would cover you, but the best thing you can do is move your funds into an offline wallet (e.g. desktop, mobile, or hardware). By splitting your money off from the giant “honeypot” that exchanges serve as, the incentive for hackers is greatly reduced.

Additionally, by enabling 2-factor authentication and using an application, you mitigate for the risk that your password or phone number are compromised. This may sound crazy, but it is possible for a SIM card to get hijacked and a hacker to use your phone number to gain access to your funds. Authly and Google Authenticator make it possible to prevent that from happening.

Wallet Management

Once you have made sure your money is on a wallet, there are still risks you need to understand. At this point, the biggest risk is that you might forget the passcode or PIN to your wallet. Or you could lose the device with the private keys on it. Both of these situations can be handled easily by taking careful note of your memetic passcode and backing up your wallets onto a second device.

It might help to back up a bit for a second. Your private key is what verifies your ownership of a public key, which can be thought of as being similar to a bank account. When you moved your coins into an offline wallet, you “took ownership” of your private keys. This is an essential part of forming a decentralized network, because if you hadn’t done that, all the keys would still be managed by a centralized source. Another way to look at it as if you are making sure no one else knows your ATM code.

Something fewer people in the ecosystem realize is they are not assigned a single set of keys, but actually many pairs. These pairs of keys are generated from a “seed root”, which is a 16 word sequence of seemingly random words (see this list for more about this). By having this seed root, you are can prove you are the rightful owner of the cryptocurrency in question. It is considered to be the password of passwords, and should be guarded as such.

Knowing all of this, the best way for you to carry on with your security is to write down your 16-word seed root, file it away in a separate area from your wallet, and then back up the data onto an offline hard drive that can be recovered in the case of emergency. All of this may sound like a paranoid hassle now, but the small time investment will make the difference.

Protect Your Crypto

By learning to manage your money well, you will be able to increase the protection of your cryptocurrency. The final thing you should consider is spreading out your funds between several different wallets. There is always the risk that a company gets compromised, and by diversifying where you hold your securities, you can reduce the effect this may have.

Featured image courtesy of Shutterstock.

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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Trading 101

Trading 101: Managing Trading Emotions And The Fear of Missing Out (FOMO)

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Fear of missing out

At any given moment of the day, there are thousands of markets waiting for you. All those charts are moving 24 hours a day, 5 days a week, and every tick means that you could make money.

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Dealing with missed trades can be a major challenge for traders. Thinking of all of the money that never made its way to your trading account is tough, and it often leads traders to make some of the worst mistakes in the market.

Things FOMO traders say…

“I knew it!” – This usually comes from a trader who were following his planned set-up but ended up not taking the trade

“I could have made so much money today.” – Everyone would be a millionaire in hindsight.

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“I waited so long for this trade.” – A trader with a trigger-happy finger who is stalking a market as it is setting up for a good trade.

“It still has room to go…” – A trader who gets in late after first being too scared to enter.

“I have a feeling…” – A trader who is not following a plan with strict rules and criteria for entry.

“I’ll just enter with a small position.” – A trader who is justifying breaking his rules.

Reasons for FOMO trading

The problem with trading is that it can often be perceived as an activity with no clear beginning or end. Basically, a trader is always in the middle of his game – a game that never stops. And when there is no beginning or end to it, you could – in theory – always enter a new trade that has the potential to make you money.

We could for example compare this to gambling at a casino. When people sit down to play blackjack, everyone understands when the game begins and when it ends. After the game is over, you can’t change anything anymore. You have either lost or you have won.

In trading, however, the game never really ends. Even after you have closed a trade, you can always get back in. Every tick in the market is a potential opportunity for you to make more profit. When we are thinking like this, missing a trade feels like leaving money on the table!

Entering early in fear of missing out

This is one of the most common situations among FOMO traders. They see a set-up falling into place in front of them, and then decide to enter their order early since the price is already moving with such strong momentum. They get worried that the price will continue to surge without them.

The problem with this is that you enter your order before the set-up satisfies all your trading rules, meaning your risk management and your planned risk:reward ratio will be completely off. What often happens later is that the price turns before it reaches your planned entry point, and you end up sitting in a losing trade that never even met your entry criteria in the first place.

Price moved too fast and you missed your entry

It happens that you have a near-perfect set-up with only one minor criteria on your trading plan not being satisfied. You then see price move strongly in the direction that you expected, while you are still sitting on the sidelines.

This is obviously painful, and it is exactly in situations like this that traders tend to commit FOMO trading like chasing the price or enter their next trade too early as in the previous example.

Instead, be patient and move when the time is right

This is the correct way to approach trading and the only way to fight FOMO. In order to do this successfully, you must have a trading plan and a checklist with all your entry criteria written down. Many active traders like to have this physically printed out on a piece of paper so that they always see it before entering a new trade.

When you have your trading rules written down, experience shows that violating them becomes much more difficult, and you will end up as a much happier and more successful trader!

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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4.3 stars on average, based on 32 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 closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.




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Trading 101

Trading 101: How to Choose the Right Chart Type

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Chart types

Chart reading and pattern trading is something we have talked a lot about in this section in the past. Still, a question many new traders may have is perhaps what type of chart is the best to use in their daily trading. Do some charts work better with technical analysis than others?

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Japanese candlestick charts

The Japanese candlestick chart is probably the most common chart type to use among those who have at least some experience with trading (not investing).

Japanese candlesticksJapanese candlestick charts were, as the name implies, developed by the Japanese back in the 18th century for trading with rice futures. Today, this chart type has gained recognition among traders around the world for all the data that it represents in a visual and easily understandable way.

 

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The way the candlesticks work is that each bar in the chart represents four pieces of price information for the chosen timeframe: opening price, closing price, highest price, and lowest price.

CandlesticksRed (bearish) candles means that the closing price is lower than the opening price, and green (bullish) candles candles means that the closing price is higher than the opening price.

The lines above and below the “body” of the candles are called wicks. Generally, candles with long wicks signals indecision by the market, and candles with longer body’s signals more decisive movements by the market.

OHLC/bar charts

OHLC is short for open, high, low, close, and consists of vertical bars with horizontal lines sticking out on the sides. They represent the same information as Japanese candlesticks, but in a slightly different way.

OHLC chart

The straight vertical lines in this chart type represents the distance between lowest and highest price during the chosen timeframe. Again, a green line means that the closing price was higher than the opening price, and red lines vice versa. Opening (left side) and closing prices (right side) are indicated by the short horizontal lines sticking out on the sides.

Line charts

A line chart is the simplest of all types of charts, and is often preferred by long-term investors, financial media outlets, and people who have little to no experience with trading and investing.

Line chart

Line charts are usually not used by traders because they only represent a small piece of the available price data, namely the closing prices for each time period that we have set the chart to. In other words, we will not find out anything about opening prices, highs and lows within each time period when looking at a line chart.

Despite this, there are cases where even advanced traders choose to use line charts because they can provide more clarity to the market. For example, certain chart patterns such as the ABC (aka. 123) pattern stands out much more clearly when using a line chart. If you try it out, you may also find that other well-known patterns like the head & shoulder stand out very clearly on line charts.

Renko charts

Lastly, we’ll go over the least common of these chart types: the renko chart. As with the classic Japanese candlestick chart, this chart type was also developed by the Japanese.

Renko chart

Renko charts are designed to filter out smaller price movements in order to focus on the bigger picture in the market. The first thing to understand about this chart is that each “box” or candle represents a certain price movement rather than a time period, as for other chart types.

When the trader sets up the chart, he can define how large of a price movement each box in the chart should represent, and the chart will print new boxes, either red or green, as the price moves beyond the chosen parameters. This means that when prices consolidate and move only sideways, no new boxes will be printed on the chart.

The main use for renko charts is in identifying important support and resistance zones when you need to filter out all other less important things in the market. It can also be an effective tool for spotting trends and reversals in the market, but usually in combination with Japanese candlestick charts to ensure you are not missing out on important price information.

Japanese candlesticks best for all-round use

In summary, use line charts whenever you need a clearer view of the price action and to “unclutter” the charts. For most other uses, Japanese candlesticks will give you the best and most accurate representation of the price. Other chart types should be used only if you have specific trading strategies that require the use of those chart types.

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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4.3 stars on average, based on 32 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 closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.




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