A Newbie in the Court Of the Golden King
Recently, I was thinking about what would I tell a friend if he told me he wanted to enter the trading world. He has a small amount to invest and is thinking about a second income, and, maybe some time in the future retire and be financially free.
Which would be the best advice to him besides, “go, look for a good and reliable manager and start making a passive income with your money”?
So, let’s assume that you’re my friend, and you’re really willing to try to start trading for yourself. What would be the best pieces of advice I could give you?
That’s hard! You’re asking me to condense 15 to 20 years of knowledge in a few words to a person that do not have the experience and psychology to act and do as myself.
So let’s do something first:
Now, let’s suppose you’re acquainted with both guides, and also have studied the usual computerised indicators that traders use. At this stage, your head is full of knowledge but, probably you’re not able to fit all this into a rational plan, to start making money. That is the reason I thought about this guide or script if you will. Let’s start
Our objective is to create the most comprehensive plan we can devise. Not only in a general way but going into the details as much as we can.
0.- The Account
Below is the sketch of an operational plan, but, first, let’s talk about the trading account. Many traders recommend starting with a Demo Account until the quality of the results awards the change to a Live Account. Please, read this article about the subject.
I think there is another way: To start with a live account, but constrained to micro-lot trading sizes. That way you’ll experience emotions not present when trading a demo account: Fear and Greed. You need to control them from the beginning to be a successful trader.
How much funding do we need?
The usual lot controls 100,000 units of the first asset on its name. for example, a lot of the EURUSD controls 100,000 Eur and every pip movement on the EURUSD, which is the fourth decimal place of the price has a value of 10 units of the second security, dollars on this case.
A mini-lot of the EURUSD controls 10,000 euros and a pip value is $1
A micro-lot of the EURUSD control 1,000 euros and its pip value is $0.1
Leverage: Leverage is the amount your broker lets you control with the money in your account. So, if you have 10,000 euros in your trading account and you buy one lot of the EURUSD you’re controlling 100K euros. The ratio trade value/account size is the leverage.
On this case, the leverage is 10. On the EU and the UK, there are maximum leverage rules, and the trader controls it automatically to force the regulations. Other exotic brokers allow the traders extremely high margins. Margin is the rope that hangs most of the traders, but this is not the time to discuss this.
On the case of a new trader, the goal is to learn to trade with the least possible risk, so we should constrain the leverage below 4 when using four assets and below 2 when using one asset.
if we are going to use micro-lot sizes it means we need to control 1,000 euros at least. So the recommended starting balance should be 1,000 euro/ Pound or Dollars. If you do not want to risk that amount, open a demo account, but ask the broker to fund it with no more than 10K Eur/Pound/dollars and switch the position size to one mini-lot.
Below the skeleton of the plan. In the following articles, we are going to develop these categories one by one.
1.- The Trading Calendar
- Why and how to use it
2.- Basket of assets
- Not too crowded and able to see trends.
- Not too fast
4.- Price action
- Identification of the current action: Is it impulsive or reactive
5 .- Indicators
- Indicators will not be trading triggers, but filters or confirmatory evidence.
- MACD and Stochastics, Rationale and how to use them
- Stalk reactive legs trade Impulsive legs using the breakout
- Define stop-loss
- Trade only if Reward-to-risk ratio is 2:1
- Resistance/supports and/or trail.
6 .- Money management/position size
- Financial objectives
- required position size
7.- Trade Activity Analysis and Evaluation
- The trading Spread Sheet
- What to measure
- Activity Evaluation
- Why discipline: The market tricks you
- Exit trades only if the profit level or stop loss is touched.
- No second guessing.