Guide for Beginners

I wrote this post because some of my friends asked me how they can learn to trade. I sat back and thought about the things that really helped me and tried to write them down here. In some senses this page was also written for my own benefit, because it is a reminder of all the hard work I still need to do.

I wrote this post because some of my friends asked me how they can learn to trade. I sat back and thought about the things that really helped me and tried to write them down here. In some senses this page was also written for my own benefit, because it is a reminder of all the hard work I still need to do.

Setting Expectations
If you are reading this website in the hope that it will make you rich by just working four hours a week in your pyjamas in between sailing trips with your trophy husband/wife, then forget it – there are no easy answers. Learning to trade successfully is hard work. Making money is even harder and keeping the money you make through trading is even harder still.

Where Do I Start?
“Absorb what is useful, discard what is useless, and add what is uniquely your own.” – Bruce Lee

Before going any further you should take some time out and carefully read the standard risk warning that most trading companies have on their websites. For example:

FXCM’s Risk Warning’s Risk Warning
I cannot stress enough how financially risky currency trading is. You should invest significant amounts of effort into your education and spend a lot of time practicing with small trading accounts before commiting any money you cannot afford to lose to currency trading.

Ok, now that that is out of the way, probably the best place to start is to buy a few books and hang out at some local trader groups and/or forums. Look for books with exercises and quizzes in them as they are often targetted at beginners and will help you improve faster than by reading passively. Don’t underestimate the value of “Complete Idiots Guides” or “Dummies Guides”. They are actually surprisingly good and are often better than books which are five times the price. The babypips website is also a good place to start. Once you have worked your way through that material, you might find some of the books listed on the books web page helpful.

Be very cautious about leverage. Any misunderstanding about how leverage works could result in you losing your account in the blink of an eye. Study how it is calculated and read about a few different approaches to money management. Make sure you build some spread sheets and play with some examples so you understand how it works.

Learning technical analysis is best done through paper trading. Doing large numbers of paper trades can help you become good at pattern recognition and trade management in a shorter amount of time then would be possible with real or demo trading.

Learning fundamental and sentiment analysis is difficult as it is non-trivial to translate what you read in books to what you see happening in the market. An easy way to get your head around fundamental and sentiment analysis is to learn by doing. Each week read a number of different market reports from a few different authors and write a weekly summary about what happened in the last week accross the market and how you think the major players will be positioning themselves in the week ahead. After you have done this for a few months, stop relying on secondary sources by other authors and start working with the primary sources of information such as economic reports and start thinking about how it links back to the stuff in text books. After you have done this for a year or two you will get the gist of it.

When learning to trade, expect that you will drift between systems and gurus for a while. This is perfectly healthy as it will allow you to build a broad understanding of trading. However, don’t be to quick to give up on something just because it didn’t work on the first few attempts. Investing more effort into a few systems or gurus can teach you much more about trading than endlessly drifting from system to system or guru to guru or religously focusing on a single system or guru.

Demo account trading is useful to find out what all the buttons do on your trading platform, but that is about the extent of it. I don’t recommend wasting too much time on it. Trading with real money is far superior to paper trading or demo account trading as you can’t cheat and peak ahead in the charts (as is common in paper trading), you experience much more of the realities of how fundamentals/sentiment affects the market (again a problem with paper trading) and how money management and psychology robs your performance (a typical problem with both demo and paper trading).

When you feel you have a good grasp of the basics of money management, trade management, technical analysis, funamental/sentiment analysis and your trading platform, open up a small account (i.e. about $1000) with a broker that lets you trade micro lots (such as Oanda). From here, you should start your next step on your journey to learning to trade. With this account your mission is to undertake 30 to 50 real trades in the market. You have to use proper money and trade management. In addition to this, you need to experiment with the full gamut of trading approaches, including trend trades, counter trend trading and range trading. The objective of this exercise is to teach you the basics of trading. Make sure you keep a trading diary along the way and in the background keep polishing your trading plan.

I cannot stress how important good record keeping is. Traders who keep poor records rarely improve over time. Good record keeping is an essential first step towards improving your performance.

At the end of your first 30 to 50 trades, tally up your results and figure out how you could improve your performance next time around. If you fail the first time it is time to take two steps back, and do some soul searching and perhaps hit the books again before you take a step forward again and repeat the exercise.

If you are confident with your approach you may consider going to the next step and top up your account with more money and repeat the excercise, but this time focussing on what works and eliminating what doesn’t. The amount in your account needs to be enough to make the psychology of trading feel real, but not so much that it will hurt your finanical future badly if your account goes up in smoke. For example, pick a figure that you can could save it up again in 3 to 6 months of thrifty living while working in a full time job. This should make the trading real enough.

Once you are successful with more money, you may choose to take your account to the next level and top your account up with more cash, but don’t be in a hurry to put a serious amount of money on the line until you have a track record under a variety of market conditions and you have a documented battle hardened trading plan.

And please, please, please, never bet your house, life savings or your retirement fund on trading. It just isn’t worth it – never ever.

It takes time to become a good trader. Unfortunately, the time it takes to become successful cannot be measured in a manner of a few weeks, months or even years. In order to become successful you need to have a number of “aha” moments where different pieces of the puzzle drop into place. These moments of clarity never come from a single source and they rarely come without hard work. A wide variety of books, courses and mentors will provide sign posts along the way. However, the one thing that will really accelerate your development is time in the market, letting experience itself become your primary teacher.

There will also be lots of poor guidance and misdirection along the way as well. Learning to discern the wheat from the chaff takes time. Some people will be well meaning, but if you are not careful, they may undermine you. By far, your worst enemy will be yourself. You will cling to bad ideas for far too long (I should know I have clung to a few). The trick to being successful in trading is to maintain a healthy degree of open mindedness and skepticism. Too much of one or the other will affect your performance longer term.