The Stock Market, Forex, Cryptocurrencies; are you interested in getting started trading but not sure where to begin?
Well, today I would like to introduce you to Matt, the founder of The Trend Trading Blog.
Matt has a wealth of knowledge on trading and has shared some of his expertise with us here at One Motivated Mommy. Visit his blog at https://thetrendtradingblog.com/ if you would like to learn more.
Trading Q & A for Beginners
Matt, thank you for taking the time to educate us about trading. Tell us about yourself. Who are you and what is your website, The Trend Trading Blog about?
Thank you for having me! I’m a retail trader from Hertfordshire, England. I began my trading journey trying to day trade the Forex market with little success. As I transitioned to longer term trend trading my results improved. My aim with The Trend Trading Blog to is to steer struggling traders or complete novices away from shorter term trading and towards trend trading. Day trading and Forex are heavily glamorised on social media, however I would love to be able to open more people’s eyes to the simplicity, profitability and efficiency of longer term trading. Less really is more and my goal is to get that point across through my blog!
Why did you get into trading?
Probably the same way most do. Fed up with my 9-5, thinking there must be a better way to live. I then resorting to Google searching ways to make money on the side, from home, online etc. So I discovered day trading and at the time I thought I could succeed by teaching myself, combined with taking bits of free information on the internet. Luckily, early on in my journey I stumbled across a trading educator that taught me some excellent risk management rules early on and gave me a realistic expectation of trading. Although I was still only taking their free information, I think this set me up well from the beginning.
Unfortunately, most trading educators these days do not give realistic expectations of what can be achieved. They sell get rich quick schemes that just aren’t sustainable, nor fair for a naive novice trader. Sure, you could double your account in a week, but the risks and luck involved in that are far, far too high.
What are stocks and what is trading?
Simply, a stock is a small part of a company. If you buy shares in a company you own a very small portion of that business. The idea of trading is to buy a stock (or any other tradable asset), with the intention that the price of the asset will increase in value. If it does increase in value, you sell back your shares and realise and profit on the price difference between your entry and exit price.
The opposite is true for short selling. A challenging concept to new traders. So how can you sell shares that you don’t own? Essentially you’re borrowing the shares from your broker, sell them, then aim to buy them back after they’ve decreased in price and return them to your broker. Thus profiting, by selling them back to your broker at a lower price than you initially bought.
With online brokers these days there are several different markets that can be traded. Of course stocks from any country with a stock exchange. Indices can be traded, which are a collection of stocks. For example the S&P500 is a stock index of 500 US companies. Forex, or foreign exchange is very common these days. You can trade one country’s currency against another. So if you buy EURUSD, you are aiming for the Euro to strengthen, against the US dollar weakening. Other common tradable markets include commodities, such as oil, gold or corn and treasuries.
What are common misconceptions about the stock market and trading?
I think the biggest misconception of the stock market and trading is that it’s too risky. Yes, of course to see any kind of returns you have to risk some money. But you’re in complete control of how much money you want to risk. You’re also in complete control on the work you put in ensuring that your trading strategy has an edge and will turn a profit over time. As a trader I began with quite a high risk tolerance because I was focused on the potential rewards. However with experience I have lessened my risk and actually improved my results. If you’re more risk adverse, then risk less money. Your risk will be a relative percentage of your account size, so if you’re uncomfortable risking what somebody recommends, just lower your percentage risk.
Another common misconception around trading, almost the complete opposite to the above, is that it is a get rich quick scheme. Social media is saturated with influencers selling trading courses and signal services to people who know no better. These marketers claim that you can be making ridiculously high returns every week if you buy their course or service. I don’t agree with capitalising by giving misleading information to naive traders. Trading can be hugely risky if you don’t know what you’re doing. Just because you’ve completed a 1 day online course on day trading, does not mean you can quit your day job the next day and start quadrupling your life savings every month. Realistic returns will mean safe risk, but this just isn’t interesting to the audience who want instant gratification without putting in the time or effort.
Are there certain qualities a person must have to be a successful trader?
Definitely. All of which can be learnt. Your mindset is everything. You’ll hear traders out there say that trading is 10% technical ability and 90% mindset. Whether the exact percentages are true, I don’t know, but I completely agree with it. The easy part of trading is to pay a mentor to teach you a strategy, or put the time in developing your own. The challenging part is being disciplined enough to stick to your strategy rules 100% day in day out. whether you’re experiencing a string of losing trades, or you’re on a profitable winning run. When real money is on the line, an untrained trader’s decision making will alter dramatically. A trader must learn to keep ego and emotional decision making away from their trading desk. Keep 100% disciplined and follow your plan.
Patience is another key quality. Patience to wait for the best trade setup that complies with your trading plan. Patience to let your profitable trades mature and not to realise your profit too quickly. Patience to not take any trades if the market conditions are not favourable. Patience really does pay.
Another key ingredient to successful trading is a true understanding of probabilities and how they relate to your specific trading strategy. Either your mentor should know, or you should have found out yourself your own probability of a profitable trade. I know that around 70-80% of the trades I take will either break even or lose me money. Thats a tough statistic to deal with if you’re new to the concept of trend trading. Day trading strike rates may differ, depending on the strategy, but that’s about right for trend trading.
So how on earth can I make any money if the majority of my trades lose? The answer lies with the size of my profitable trades. I’ll hold them for as long as possible, assuming the market is moving in my favour. The old saying, ‘cut your losses quickly, let your winners run’ is completely relevant for me.
Should I start reading the financial section of the newspapers or financial websites if I want to trade successfully?
No. Unless you want to be a fundamentals trader. A fundamentals trader will make trading decisions based on news, financial information of company’s stock, interest rates etc. I’m a technical trader, which means I make my trading decisions based on the price chart of the market I’m trading. I look at the price, support and resistance and a few other technical indicators such as volume for stock trading.
If I read something negative in the paper about a company’s stock, but my technical price chart is telling me to buy, then I have conflicting information. More often than not what is said in the news is over dramatised and misleading anyway. Price charts on the other hand do not lie. So many times a company’s earnings announcement has beaten expectations, yet the stock prices falls anyway. Where’s the logic there? Likewise during 2017’s strong bullish US stock market, every other week so called expert analysts were preparing for a crash. While they were saying that, I was still buying stocks based on my technical decisions. If there is a stock market crash, my downside is carefully managed. If I had listened to them I would have missed out some great returns.
Why do so many traders fail?
Probably the number one reason is due to a lack of education. Unfortunately traders often enter the markets with inflated egos and the misconception that its a get rich quick scheme. They’re risking too much and not willing to admit when they’re wrong on a trade, creating losses far larger than profitable trades. They think they can beat the market without a mentor or close community to help them through their learning years. These types of traders do not implement any degree of discipline, routine, patience or consistency. They think short term and think paying for a mentor is too expensive and money they’d rather have in their tradable capital.
Another common cause of failure, relevant to all aspects of life, is giving up! Failing traders take a few losing trades that are inevitable. They then lose interest in that probably perfectly fine strategy and continue their search for the holy grail. The fact of the matter is all trading strategies will have losing trades. unfortunately this key fact is missed out of the content posted by so many course vendors. After these traders have tried a few strategies with no success, they give up, frustrated and blame the markets.
Should we take advantage of the online trading platforms that allow us to trade online or stick to the traditional broker route?
Online brokers are fine and are the easiest way to access the markets. But there are some things to be wary of before choosing a broker. Firstly, ensure they are regulated by the FCA or other relevant financial authority. This way you know your money is safe should your broker go under. I prefer to use recognised brokers that have a good reputation. This gives me extra piece of mind. Next I would look to make sure the broker actually offers the markets I want to trade. I trade across multiple asset classes including US stocks. There are thousands of stocks available so I want a broker that offers as many as possible so I can scan them to find the best opportunities.
What should I look for in an online trading platform?
In terms of actual trading software and charting I would recommend not to use broker platforms for your analysis. Of course use their platform to execute and manage trades. But I recommend using separate professional charting software for your analysis. The functionality for technical trading is far superior. Also such software packages offer stock scanners, multiple chart layouts and multiple savable watchlists. These make your trading so much more efficient. I use TradingView for my trading software.
It seems that the trading world is abuzz with words like Bitcoin and Cryptocurrency. Can you explain what these are about?
To be honest, Cryptocurrencies are not a market I know as much about and not an area I have yet invested any money. Bitcoin is a type of cryptocurrency. A cryptocurrency is essentially a virtual currency that is completely decentralised and not currently backed by governments or banks. I believe these types of currencies are where the world is going, and certainly the technology involved is here to stay. However cryptos are very volatile and I wouldn’t recommend trading them. I would only look to invest long term at the moment due to their volatility.
Researching and choosing stocks to trade…any tips?
I recommend using scanning software to identify a shortlist of stock. Your scan filters could include things like; all time highs, stocks outperforming the overall market, high rate of change, 52 week highs, gap ups, increasing volume etc. Be consistent with your scans to find your stocks. Once you have your list of stocks, look to shorten that list further and build a watchlist. Things I would look for in a bullish trend would be support and resistance or a good base, gaps, linearity of trend, the stock’s trend history, volume and stocks in the best performing stock sector. Once I have my concise watchlist of the best opportunities, I would look to allocate risk on the best setups according to my specific strategy.
I would advise against taking trades based on hunches, gut instinct or random tips. Keep your trading as mechanical and fact based as possible.
Forex, Commodities, Stocks, Cryptocurrencies, Futures, CFDs, Options…These all seem so confusing. Where should a beginner start in order to understand which is best to invest in? Should we choose one and focus on it or diversify?
As a trend trader I simply follow the money from market to market. If the stock market is trending and that is where the institutional money is, that’s where I’ll allocate the majority of my risk. Often as the stock market stops trending and starts to go sideways, other asset classes will come to life, such as Forex or commodities. If that happens I’ll look to move my risk to those markets that are beginning to trend.
In terms of account or contract types, this will partly depend on your own circumstances and country of residence. I trade forward contracts in a spread betting account because I am UK based. Spread betting is not available in many countries, in which case a CFD or contracts for difference account would be more appropriate for you.
Forward or future contracts are more cost effective for longer term trading because you do not pay a daily charge for holding a trade open. Instead you just pay a larger spread (the difference between the buy and sell price). If you hold trades for a shorter period of time a DFB or daily funded bet may be more cost effective. With these you’ll pay a smaller spread but you’ll pay for everyday you hold the trade open. However these charges are based on leveraged accounts where you’re borrowing margin from your broker and being charged interest.
This can be a complicated and overwhelming topic for new traders. For a full explanation on account and contract types read my blog post below:
https://thetrendtradingblog.com/2018/06/08/understanding-trading-brokers/
Trend Trading, Day Trading and Swing Trading, how do these differ? What is your preferred method and why?
Day trading is a style where you’ll trade from shorter time frame price charts. You’ll enter and exit multiple trades per day with the aim to profit from small price changes in that market. This style of trading requires a lot of time commitment.
Trend trading is my style and recommended way to trade. I’ll trade from daily time frames, rather then 5, 15 or 60 minute time frames as with day trading. This will eliminate much of the intra-day noise. A trend is defined as when price makes higher highs and high lows. I aim to hold trades open for months at a time with a wide trailing stop loss that follows price as it makes new higher highs. My stop loss will cater for higher lows or pullbacks within the trend and only stop me out when the trend reverses or creates a deeper than usual pullback. As price makes new highs I’ll strategically buy more of that stock and move my previous position stop loss to entry point, thereby removing the risk. This is called compounding and will increase my buying power of a trade without an increase in risk.
Swing trading is similar to trend trading, just slightly shorter term. With trend trading the aim is to capture the majority of a trend, including its higher lows or pullbacks until it reverses. With swing trading you’ll aim to capture swings in price movement. So you may capture each upwards move of a bullish trend and look to exit before the next pullback occurs. Alternatively, if price is not trending and is in a range, a swing trader may look to capture price movement between support and resistance within that range. With swing trading you would be looking to hold positions open for a few days to a few weeks.
I would recommend trend trading because of its simplicity and lack of time commitments. Trading from daily charts means you only need to look at your trades once a day. My whole trading routine takes me roughly 15-20 minutes per day. Day trading on the other hand will consume more time because you are in and out of trades multiple times a day. For me trading is partly about the time freedom it can bring. Trend trading can free up your days while your capital is still working for you. This means you can spend your time building other businesses or doing whatever it is you want to do!
How does one develop a trading strategy?
This can be an overwhelming process as a beginner. There are literally hundreds of ways to make money from the financial markets. Honestly, I would start by finding a mentor who already has a handful of profitable strategies that you can learn from. Your mentor should be able to teach you those strategies, then guide you if you want to personalise something to suit your personality or lifestyle.
Alternatively, you can start from scratch. The first thing you need to do is research. Research a bit about what you want your strategy to include. Will it based on buying breakouts? Moving average crossovers? Inside bars? Harmonic patterns? There are literally so many variables. Once you have a basis of a strategy that includes which markets you trade, which time frames you use, what your technical analysis consists of, how to identify a setup, how to enter, manage and exit your trade. Then you can begin testing it. Now this is the time consuming but critically important part. You must thoroughly backtest your strategy across a large enough sample size. This means looking back in history of the markets you trade and manually execute that strategy as if it were in real time. Across a representative sample size, this should give you the statistics of your strategy. From this data collection exercise you’ll gather information such as your win/loss ratio, profitability, expectancy, drawdown size etc. There is software available to automatically back test strategies, but I prefer the manual option because it forces you to learn the execution of your strategy inside out. Remember there is no way of knowing if your strategy is actually profitable without testing it!
There is risk involved in trading. Can you explain what this means for anyone wanting to become a trader?
As a trader you will have a trading account with your capital. Then as you enter trades you will risk a small percentage of that capital, say 1%. So if you have a £10,000 account, your 1% risk will be £100. So the distance between your entry point and stop loss would be £100 and that’s what you would stand to lose if you were stopped out. Likewise if price moves in your favour the same distance, you would be £100 in profit. You may have several trades open at once, thereby increasing and diversifying your risk. Risk is personal and completely up to the individual trader. One piece of advice though, do not focus solely on what you could gain. Always prioritise your risk because the truth of the matter is, as a trader you will have losing trades.
Of course, to realise any sort of profit you must risk something. But as a trader you’re in control of your risk and can therefore suit it to your own risk tolerance.
Should I practise with an online stock simulator? Are there benefits or disadvantages to using a simulator?
Stock simulators or demo accounts can be an excellent way to practise your trade and strategy execution. They’ll also help you get used to your broker’s platform. However they have their limitations. As mentioned above, trading is 90% mindset. Using a demo account will not develop this side of your trading. When it’s not real money there’s no way you can know how you’ll behave when it is. Start with a demo account, sure, but at some stage you’ll need to dip your toes in to experience how you must develop your mindset to succeed.
Do you have any suggested books to read on trading for beginners?
Definitely. My first book would be ‘The Way of the Turtle’ by Curtis Faith. This is based on an experiment carried out in the 80s. The idea was to prove whether or not trading could be taught. The exact strategies used in this book were released and they are so simple. This book really emphasises the importance of simply following your strategy rules to the letter to allow your edge to play out.
My second recommendation would be ‘Trading in the Zone’ by Mark Douglas. This is a real in depth book that delves deep into the psychological aspects of trading. A definite must read for any level of trader.
Lastly ‘How I Made $2,000,000 in the Stock Market’ by Nicolas Darvas. Of course an appealing title, but this book really shows how trend trading can enable anyone to make serious income from literally a few minutes of work per day. This book was based before a time of mobile trading apps and online brokers. Yet Darvas was able to trend trade the markets whilst travelling the world for his dancing career.
Do you have any final words of advice for anyone who wants to get into trading?
If something sounds too good to be true, it probably is, so please don’t believe you can safely double your money every month! Trading takes time, patience and perseverance to master, like anything worth having. But the rewards can be so worth it. My best advice is to invest in a mentor early on, consider trend trading over day trading and do not give up!
Very interesting content on your blog. Love it