Share Trading Tips - what do I need and how do I do it?
Share Trading is a great way to start your trading experience. Lots of online marketing to traders targets Forex, Indices, Exchange Traded Funds (ETFs) and a variety of derivatives like CFDs (Contracts For Difference), Options and Futures, but these tend to be either more complicated, riskier and volatile for the new trader.
For example in Australia our ASX (Australian Stock Exchange) is about ninth biggest volume in the world, which means there are lots of great shares with good liquidity. And, obviously, when you go in for stocks/shares/equities through the London Stock Exchange (LSE) and the New York Stock Exchange (NYSE) there’s even more to choose from.
You are asking yourself: But where do I start? What is a reasonable capital to have that will allow me to make some money? How will I find potentially good trades? Do I need to follow some rules?
Here at TradingLounge we understand share trading from the beginning to the end. In other words we’re going to be able to assist you as a beginner right up to being an advanced trader looking for new strategies and analysis. SO here is a brief overview of the most important questions you’ll need to understand and answer before getting stuck in too deeply!
LET'S GET AN OVERVIEW
Share Trading Capital, Risk, the 80/20 Principle and Draw Downs !
WHY DO I NEED $15,000 - $20,000?
Because you want to minimise risk exposure but enough to make a decent purchase! As you know, one of the first questions we ask ourselves when we are share trading, is how much should we risk per trade - 2%, 3%, 5% or 10% per trade? New traders tend to simply bet how much they feel based on how confident they are of the current trade situation.
There are many pit falls here, like risking too much, and chasing the market — the more you lose the more you risk, and so on. We call this emotional share trading, so if you are going to be a winner, then first up you have to get Risk Management under total control from the get go.
WHAT DO I RISK?
I risk only 1% of my capital per trade including costs with an account under 50K. Let’s say you have $15,000 to trade and your risk per trade is 1% then you can risk $150 per trade including brokerage, how simple is that!
Next, how many shares you can buy with your $150 risk will also depend on how close your stop-loss-price is to your entry-price.
The closer your stop-loss-price is to your entry-price will allow you to buy more shares and the further away your stop-loss-price will be less shares. TradingLounge has a calculator to work this out for you. However your technical analysis and your trade set-up strategy will determine the entry and stop prices. But think of 1%. More on this here share trading education.
UNDERSTANDING THE PROFIT & LOSS TO TRADES RATIO: THE 80/20 PRINCIPLE
Let’s say, you get a share trade signal service like TradingLounge’s or find your own share trades, whereby you can consistently get 50% of your trades correct.
This means, say out of 10 trades you get 5 wrong and 5 right, this is a reasonable place to start the numbers, if you’re getting 6 or 7 trades out of 10 correct share trades, then you’re doing extremely well indeed, but you can also get 3 trades right and 7 trades wrong and still make money depending on your share trading strategy, e.g. keeping your risk small 1% and letting your profits run...
But let’s stay with the 5 wins and 5 losses (risking 1% per trade. So 5 losing trades is going to cost you 5% of your capital at 1% per share trade is a $750 loss of your $15000 account, which is now $14,250. Knowing your loss before you start trading is extremely valuable from an accounting point of view and a psychological point of view, being unemotional and having a clear mind to make clear decisions once in the trade is in play is imperative. The more organised and mechanical you can be with your share trading the less emotional you can be – there is nothing worse than making emotional decisions while the trade is in play.
This is how, on average your 5 winning trades will play out… that’s if you have a trading plan to keep your losses small and let you profits run.
Out of your 5 winning trades, some will make a small profit, then get stopped out. Some trades will break even and a few trades will actually run with the trend. Only 2 of your 5 winning trades are likely to run nicely, in-line with the main trend and make enough money to be profitable.
So look at it this way, 2 of your 10 trades will make most of the profit. I like to gravitate to the 80/20% principle here and simply say you will make 80% of your money out of 20% of your trades and dare I say it again, by keeping your losses small and letting all your trades run is the key. Risk 1% per trade of your capital and have a trading plan to allow the market to run, as many traders take profits too early. See TradingLevels to understand price targets.
DRAW DOWN: HOW MUCH OF YOUR TOTAL SHARE TRADING ACCOUNT ARE YOU WILLING TO LOSE?
So this is another aspect you need to understand. This comes into play with the more trades you do and it’s also a natural occurrence and you need to build it into your share trading business plan so your total losses don’t get out of control.
The Draw Down can also be referred to as the Losing Streak and if you do enough trades you will run into it! Its where you have a large number of losses in a row – say 10-15 losses in a row. If you stay within the 1% risk per trade, then your overall account could draw down 10-15%. If you’re risking 2% or more you will see how quickly your account could have 50% draw down. There is actually a mathematical equation for the losing streak:
POTENTIAL LOSING STREAK CALCULATIONS
LS=LN(#of trades)/-LN(probability of a losing trade)
Where, LS=Losing Streak LN=Natural Logarithm
Win% loss in a row
Example: So getting 7 trades right out of 10 would still give you a losing streak of 9 at some point. Keep this calculation in mind to keep your capital!
So how do I manifest these profits on the horizon?
A ShareTrading Course? First, in my humble opinion do not go spending $5,000 or more on a trading course, in most cases these are just a ripoff or something that you can buy in a book–it’s how these companies make their money. Most trading knowledge has already been written in a $20-50 book and you simply need to practice, practice and practice.
I have met many people who have spent more than 5K on a course and are no better off. Buy books and save your money for a real education in the markets – you’re going to need every cent. I would not recommend spending more than $500 for a share trading course
SO WHAT DOES TRADINGLOUNGE OFFER?
All our share trading education is included in the membership, even one-on-one training. TradingLounge offers Daily Share Trade Signals, Technical Analysis (daily charts/videos), Share Trading Education and Trading Tools – all included in the 2 week trial for $7.
The money is in the trend
It’s our share trading goal to catch trends, as more money comes from being in the trend. So our share trading is focused on what is trending and even though we may be trading a stock in a particular country we look into the many drivers for that.
Here’s an example: if we are trading gold stocks, we look at other gold stocks in different countries to see if they too are moving in the right direction and of course check in with US Spot gold, other metals, the banks, Indices and currencies (as indices will move up while gold corrects creating another share trade or adding to a position); we would also hold gold stocks in the U.S.A. / NYSE, United Kingdom / LSE and Australia / ASX.
Share trading with TradingLounge mentoring
We’re all different and our methods may not suit you, you may find some aspects very helpful and some not, it’s important that you always continue to develop your own trading rules and techniques. But we are here to help you personally with whatever you need to learn. We also have a service called TradeCheck where we can look at your analysis or trade situation, this is a great live learning tool
What type of Technical Analysis do you use?
I use three analysis methods which I teach. I use them daily in analysis and I place daily trades with a combination of these three methods. They are Elliott Wave, TradingLevels and Volume analysis.
First, the Elliott Wave is for price pattern recognition.
Second, the TradingLevels are about the psychology of price.
Third, Volume Analysis is used to see the strength of trends and corrections.
These trading tools are used together to support the trade set-ups, entries, stops and targets.
NOTE: I don’t use indicators and while there is nothing wrong with using a few indicators understand that they are like learning wheels. All indicators are from the price and volume in one way or the another so I generally find that when you truly understand the calculation of an indicator you can then simply see it in the bar chart itself or the volume. You can learn Elliott Wave, TradingLevels and Volume from TradingLounge and I’m very happy to personally help you in any way I can.
Tools of the Trade
Call me old fashioned, but I like to have my own end of day charting software on my machine and I pay for quality end of day data that is managed by a professional company, because I need to know if the price is accurate. But more importantly the charting program is independent from the broker and most of all, it helps me be better organised. If I have the price data already on my computer I can then click through my watch lists much faster – I flick through up to 200 charts in each country I’m trading. Another benefit of actually eyeballing each chart everyday, I get to see how each stock is progressing in its pattern and so, when it will be ready to trade. I simply learn so much more being in tune with each market rather than using scanning software. As a TradingLounge Member you can download the TradingLevels charting program, which you should do if you really want to learn to trade more safely.
Broker Chart Programs
These are web based and most are simplistic, they are fine for placing and managing the trade, but they aren’t that good for being organised, flicking through loads of charts to find the best trade set up. Many brokers have their own web based charting program to trade through and some even have third party charting platforms that you can pay a little extra for and I suggest to do this as the charting tools will be better, but because they have to pull the data from a server they can be not only slow, but more so, its more cumbersome having large lists of stocks to flick through quickly.
BROKERS: WHO DO I TRADE WITH?
Safety First If you’re new to trading you won’t realise how many stock brokerage companies have actually failed. The common thread for brokerage house failure is simply that these stock brokers trade themselves, so you do not want to use a brokerage company that trades for themselves. You only want your stock broker to execute orders.
Next is cost, this will depend what country you live in and what exchange. I’m in Australia so an example of a low cost and low amount trade would be $8 for each side of the share trade or you could end up paying $20 from another broker, so the cost is important, especially when you consider your $15,000 share trading account and risking 1% of that account which is $150 including costs such as brokerage $20 to enter the trade and $20 to exit the trade e.g. $40 then brings the actually trade risk to $110 so the cost is a big chunk with consideration.