Last Updated on 28 February, 2020 by Therobusttrader
Getting started in trading as a beginner indeed is a daunting task. You need not only to get a grasp of the technical aspects of the markets, such as different order types and what securities to buy, but also learn how to develop your own trading strategy, only to name two things.
To help you get going quickly, we decided to put together the most complete beginners guide to trading you’ll find online. We’ll cover everything you need to know in order to get going and start your own trading career.
The guide will be divided into six different steps, to make it easier to navigate. You may use the table of contents below to quickly jump to your desired section of the article.
Let’s start by looking at the most common trading styles, and how you pick one that suits your goals!
Step 1: Deciding on a Trading Style That Fits You!
One of the first decisions you’ll have to make as a new trader, is which trading style you should go for. The choice you make will have a big impact on the work that’s required. For example, some of the least time requiring options won’t need more than 15 minutes per day, while other trading styles may require you to sit by a computer all day long.
Before we look at what trading form suits you best, we’ll just present the four trading forms that you’ll be choosing between.
This is the trading form that beginners tend to focus on the most.
In short, daytrading means that you close all positions before the end of the day. Thus, it’s a fast-paced trading form that requires constant monitoring. A buy signal could occur at any time, which means that you’ll have to be on your toes not to miss out on a signal.
Daytrading is the hardest type of trading on this list, and very few possess the ability to daytrade without a fully mechanized trading strategy. We’ll come back to this later in the article!
Advantages of daytrading:
- You don’t have any overnight risk since you always close all positions at the end of the day.
- Often you’re allowed to use more leverage as a daytrader, meaning that you may extract more profits from your trading strategy. Of course, leverage is a double-edged sword that will magnify losses as well.
- If you have the right strategies and access to good infrastructure, you may make a lot of money.
Disadvantages of daytrading:
- It’s very hard to find a profitable trading strategy
- You’ll have to constantly monitor the markets while they’re open, not to miss a trade.
- It’s psychologically demanding to have to sit long hours in front of the computer, often without making a single trade.
If you want to read more about day trading, you should definitely have a look at our day trading guide.
Swing trading is a more slow-paced trading form where you hold on to your positions for one day to a few weeks at most. In other words, a swing trader attempts to catch the short to medium-term price swings.
For beginners, swing trading is the ultimate trading form since it takes very little time and can be executed even by those who have a full-time job, while still having great profit potential.
To provide some perspective you may be able to swing trade by spending as little time as 15 minutes each day only. You just have to scan through your market for signals, and place your orders for the next market open.
Advantages of swing trading:
- It takes very little time to swing trade as soon as you have a strategy in place. In other words, it’s perfect for beginners!
- There are some great profit opportunities
- You can have a full-time job on the side
- It’s less psychologically demanding than day trading
Disadvantages of swing trading
- You’re subjected to overnight risk, since you hold positions for several days. This means that the market may gap down and go well below your stop loss level.
- If you’re trading stocks, it might be hard to find trades that are uncorrelated. Typically you want your trades to be uncorrelated, in order to decrease risk.
For those who are interested in learning more about swing trading, we have a massive guide to swing trading that covers most of the things you need to know!
This is a trading form that’s even slower than swing trading. A typical position trader holds his positions from a couple of weeks, up to several months or even years. This means that they’re attempting to catch the really long trends in the market, and use mainly trend following strategies.
Position trading, just as swing trading, takes very little time to execute, and could easily be combined with a full-time job. Thus, it’s a great trading form for beginners!
Advantages of Position Trading:
- It takes very little time and can be combined with a day job
- You hold positions for long periods of time, which means that transactional costs aren’t an issue.
Disadvantages of position trading:
- Position trading strategies tend to have quite low win rates, which can make it hard to consistently execute the trades as they occur.
- Some people argue that position traders miss out on shorter-term opportunities since they have their capital tied up in their long term positions.
The last trading form that we’ll cover is the one that is our main focus here at The Robust Trader.
Algorithmic trading is trading by set rules, that are executed by a computer. This means that you don’t have to monitor a strategy all the time, but may let that over to a computer. Thus you may trade many strategies at the same time which results in superior risk handling and diversification, which also translates into higher profit potential.
Advantages of algorithmic trading
- You don’t have to spend time executing your strategies, and have more free time.
- You can trade a lot of trading strategies. We sometimes trade 100 or more strategies at the same time. This opens up for unparalleled possibilities for diversification across timeframes, markets, and trading styles, which in the end means higher returns at a lower risk.
- You can spend your time developing profitable trading systems, instead of placing orders manually.
- Less psychologically demanding
Disadvantages of algorithmic trading:
- It might not be the most beginner-friendly trading form out there
Our 10,000-word long guide to algorithmic trading is the perfect place to start if you want to learn more about this trading form.
Deciding which trading form that’s right for you.
Having been presented with four different trading styles, you may wonder which one suits you best. After all, the trading style you should go for is highly dependant on your personal preferences, as well as the goals you have set as a trader.
Regardless of your aspirations, we usually recommend that you start with swing trading if this is your first attempt at it. In our experience, it’s the perfect trading style for beginners, since it doesn’t require too much of your time and lets you try out trading before you venture into more demanding trading forms.
To make it easier for you, we have summed up some points for each trading style, that may help you make your decision. However, since daytrading isn’t suited for a beginner, we’ve chosen not to include it below.
You should go with swing trading if you:
- Want to try out trading
- Don’t have that much time to spend
- Want a reasonable profit potential
You should choose position trading if:
- You want an even slower paced trading style that doesn’t require much time
- You’re comfortable riding trends for long periods of time, as well as being wrong most of the time.
You should go for algorithmic trading if you:
- Are really serious about your trading and even might consider going full time some time down the road.
- Want to be able to day trade without spending all your days in front of a computer screen.
- Want to keep your day job. You may develop the strategies that the computer trades in your spare time.
If you’re still not feeling sure about which trading form you should go for, swing trading probably is the best choice for you.
Step 2: Deciding What Securities You Want to Trade
Most beginners step into the world of trading with the goal of trading whatever they know best, and usually, that is stocks.
While stocks trading is a good choice, there are some other types of securities that you definitely should consider giving a shot! Let’s have a look at some of the most common ones, and their advantages and disadvantages.
Most people who start trading want to go with stocks, and this an excellent choice. Apart from having hundreds if not thousands of securities to trade, you may also trade ETFs that track commodities like gold and crude oil, to get even more options.
Advantages of stocks and ETFs:
- There are many securities to choose from, which means that there is a lot of opportunity.
- You may even trade commodities and financial indexes, through so-called ETFs
- There are many liquid stocks out there that can be traded in large quantities with no issues.
Disadvantages of stocks:
- Trading is mostly limited to regular exchange opening hours, with some exceptions for after-hours trading.
- While there are quite some ETFs that track commodities and financial indexes, you’ll find that there often is more volume in the competing futures contracts.
Futures are leveraged instruments and basically are agreements to buy or sell a predetermined amount of a commodity or asset, at a future date and price.
If this is a little hard to understand, the easier explanation is that futures track the price of an underlying asset, such as gold or a stock index, and provide a lot of leverage. This means that you can take relatively big positions even with a smaller trading account.
So, why should you trade futures? Well Let’s have a look at the advantages:
Advantages of futures:
- There are many liquid futures contracts available for a variety of markets, where it might be hard to find other alternatives with enough trading volume.
- You can trade nearly 24/5, even when the market is closed.
- Futures offer a lot of leverage
- They are standardized contracts. This means that you always know what you buy yourself into, and what terms that apply.
- If you have been into options, you know that they are subjected to “time decay”, meaning that the value of the contract declines as it approaches the expiration date. Futures don’t have this, which is a significant advantage if you want to hold your positions as you would hold any stock or ETF.
Disadvantages of futures:
- Future contracts always have a set expiration date, and in order to stay in a position when one contract expires, you’ll have to “roll over” the position. This means that you switch contract from the one that’s expiring, to one with a later expiry date. Our article on how to roll over a futures contract covers this in greater detail.
- Leverage is a double-edged sword and can be very dangerous if you’re not aware of how it works. Thus, you need to make sure to understand this before trading futures.
If you want to learn more about futures, we recommend that you read our guide to futures contracts.
CFDs, which stands for “contracts for difference” are similar to futures in some respects but very different in others.
CFDs offer quite a lot of leverage, but unlike futures, they aren’t traded at an exchange. Instead, a CFD transaction is always made between the buyer and the broker, rather than the broker acting just as an intermediary between the buyer and the exchange.
This means that CFDs don’t trade in a centralized open market, where quotes and rates are available to all market participants. As such, some CFD providers have been accused of price manipulation. However, with the fierce competition between CFD brokers these days, this shouldn’t be an issue anymore.
Another key difference is that CFD brokers seldom charge commission. Instead, they take a spread, meaning that buyers always have to enter a position slightly above the market price, and sellers always have to get their positions opened slightly below the market price. Thus, the difference between the market price and the price charged by the broker goes right into the pocket of the CFD broker.
Advantages of CFDs:
- You can trade nearly 24/7, even when the market is closed
- They offer a lot of leverage.
- Unlike futures, CFDs don’t expire, and won’t require you to roll over your positions.
- Getting started is easy and fast
Disadvantages of CFDs:
- Again, leverage is a double-edged sword and should be used with caution
- The spread can be quite high, making it impossible to profit from smaller moves. Make sure to check your broker’s spreads before opening an account
- The contracts aren’t standardized and don’t trade on an open exchange
Which Type of Security Should You Go For?
Which type of security you should go for depends a lot on the type of trading you want to do, as well as your personal preferences. Thus, it’s not possible to give a universal answer. Instead, we’ll go about as we did in the previous section of the article, and list a couple of relevant points for each type of security.
Stocks trading suits you if:
- You’re mainly interested in trading common brands you know about, such as Coca Cola, Microsoft, and Google.
- You want a lot of securities to choose from. There are literally thousands of stocks out there.
- You want to focus on swing trading, where you often use one strategy for a lot of stocks. The large number of stocks to choose from increases the odds that there always is something to trade.
Futures Trading Suits You if:
- You want access to a lot of commodity markets, some currency pairs, and the most widely traded stock indexes, like the S&P500 and Dow Jones Index. Nowadays there are also futures on stocks.
- You want to trade markets that are open nearly 24/5. While some futures markets only are open for the daily session, the major contracts can be traded throughout the night on weekdays, with a short halt for maintenance.
- Your trading is quite short term. Futures are not suited for traders who like to hold on to their positions for many years, due to contango and backwardation.
CFD Trading suits you if:
- You want quick and easy access to the markets also offered through futures trading
- You want to have access to the markets 24/7. Although all brokers don’t offer this, there are some brokers that do.
- You understand that CFDs are more expensive to trade than futures, but feel like the other advantages are worth the added cost.
So, we hope that we’ve given you some guidance and made things a little clearer. Still, we understand that this can be a hard decision and would suggest that you take your time to see which one suits you best!
Step 3: Choosing a Broker
The next step is to open a trading account with a broker of your choice. Depending on the type of security you’re going to trade, you should look into a broker that specializes in your particular products. In addition, you should look for the following things:
1. Compare commissions and transactional fees
The effect of commission and transactional fees should not be underestimated. Especially not if you’re trading a fast-paced trading strategy that makes a lot of trades and therefore will incur costs much quicker.
Today more and more stock brokers have gone over to not charging any commission at all, which puts you in a very favorable situation if you’re looking to trade stocks or ETFs.
This is also the case with CFDs trading at the major CFD brokers. Just keep in mind that while these contracts cost nothing in slippage, they often have a big spread that could be quite significant.
2. Watch out for account minimums
Some brokers may demand a minimum initial investment, like $500 or $1000, which could be an issue if you’re looking to start off with a small amount.
3. Pay attention to account fees
Even though it might not be possible to completely avoid all account fees, you should definitely make your best to minimize them as much as possible. For instance, many brokers will charge a fee for basic operations, like closing your account or transferring funds out of your account.
Here are some common fees that you should look up before going with a broker:
- Annual fees
- inactivity fees
- Subscriptions for market data
- Trading platforms subscriptions
As you see, there are quite a lot of fees that brokers could charge you if you don’t pay proper attention!
3. Consider your need for trading technology and education
Some brokers, like TradeStation, offer advanced trading platforms for free to their clients, while other brokers just offer the very basics in terms of order execution and the like.
If the trading platform is important to you, you should definitely have a look around to see what the different brokers offer. Although the platforms often are available even to those who don’t hold an account with the broker, there usually is a quite high monthly fee that you want to avoid.
Another key consideration is the educational resources that are available. Many brokers try to make their services as compelling as possible for newcomers to the market by providing extensive libraries of educational material.
Step 4: Getting Familiar with the Different Order Types
Once you have a trading account up and running, it’s time to understand the different order types that you’ll be using.
We’ll briefly cover the four most common order types, which are
- Market orders
- Stop orders
- Limit orders
- Stop Limit Orders
Market orders are the most common order types and essentially are orders to buy or sell at the closest price offered by the market. If you click the buy or sell button without making any configurations to your order, this is the order type you’ll be using.
A stop order is an order that will stay in the market until the price reaches the specified stop level. Once it does, it will be turned into a market order.
So if the market trades at $100, and we issue a buy stop order with the stop level set at $110, then the order will turn into a market order as soon as the price reaches $110.
A limit order is an order type that only will be executed at the limit price or better.
So, if we issue a buy limit order with a limit price at $120, then we’ll only buy the security at $120 or lower.
Similarly, if we issue a sell limit order with the limit price at $120, we’ll only sell the security at $120 or higher.
Stop Limit Orders
The stop-limit order is a combination of the stop and limit order types.
In essence, it means that you place a stop order which won’t be turned into a market order once the stop level is hit, but a limit order.
So, if we have a sell stop limit order with the stop level set at $115, and a limit level at $110, it means that a limit order to buy at $110 or higher will be issued once the market goes down to $115.
With a stop limit order you have more control over the price at which your order is going to be filled.
In the image below you see how the limit level is set below the stop level. This means that the sell stop limit order will sell the position as soon as the stop level is hit, provided that the position can be filled at the limit level or higher.
Step 5: Developing/Finding a Trading Strategy
This is the biggest and most important challenge that you’ll have to overcome as a trader. Without a profitable trading strategy, you have a very little chance of success, and will most likely end up as a losing trader.
Expressed in another way, you could say that trading without a proven strategy is like gambling. And as traders, gambling is the very last thing we want to spend our time doing, since it doesn’t have a positive expectancy.
In fact, most traders don’t have a winning trading strategy, which is one of the main reasons why as many as 90% or more of all traders fail!
So, what does it take to not fall into that category? What must you do differently?
Well, you have to validate the patterns and ideas you attempt to trade. Most traders never do this, and end up believing in strategies and patterns that have no edge whatsoever!
How to validate a strategy
To ensure that a strategy works, you could go about in three ways.
- You can paper trade the strategy for some time, and see how it fares
- You may use historical data to manually place trades as they would have occurred historically.
- Or, you could use backtesting software to simulate the historical performance of your strategy.
The last option of the three is by far the most effective approach, simply because it takes so little time. Having to go through a strategy manually indeed is time-consuming, and learning a good coding language, like Easylanguage, will free up a lot of time that could be spent on more productive tasks.
With backtesting, as soon as you’ve coded up your strategy, you’ll press a button, and get a performance report like the one below. This makes it possible to discard an idea if it doesn’t show any merit, rather than spending many months or years paper trading something that doesn’t work!
However, even if backtesting still is one of the best tools you can use as a trader, it’s worthless if you don’t know how to use it correctly.
Many new traders believe that they may just start trading anything that works well in the backtest. After all, it HAS worked well in the past, so why not trade it?
Well, it’s here the issue of curve fitting comes into play.
What is curve fitting?
In short, curve fitting means that what you observe in the markets may just be the result of pure randomness. In fact, most market action is completely random, and can’t be used to trade successfully. Only a small portion of all the data out there is “true” market behavior, that can be used to build successful trading strategies.
So how do you discern between real market behaviour, and randomness in the market?
We’ll there are a couple of methods that try to address this issue, with varying results. According to us, the best thing you can do is to simply let your strategy sit for a while for validation. During that time, you record the trades it takes, and once you have enough trades to make a statistically significant observation, you see if the strategy holds up.
Three Simple steps to building a trading strategy
- Come up with an idea
- Test the idea with any of the three methods just mentioned.
- Validate the idea, to ensure that it’s not curve fit.
Step 6: Learn How to Protect Your Capital
When some traders finally have found a trading strategy, they believe they’re all set. The only thing they need to do is to take on as big trades as their account balance allows, and collect the profits.
Now, those who take this approach haven’t understood one aspect of trading which is as important as having a good trading strategy
We’re talking about risk management!
Why Risk Management is important
All trading strategies, regardless of how good they are, will have their losing streaks and bad periods. And as if that wasn’t enough, all trading strategies are going to fail eventually, as markets constantly change and make old concepts go out of sync with the market.
Due to these reasons, it’s paramount that you make sure to never risk too much of your account balance on a trade. Otherwise, you risk getting wiped out as you enter a losing streak, or get into a significant drawdown that’s hard to recover from.
One essential thing to realize here is the returns that are required to get back to breakeven increase faster the more money you lose.
For example, to recover from a 20% loss, you’ll need a return of 25%.
However, to recover from a 50% loss, you’ll need a massive return of 100%.
This is why it’s so important to limit your potential losses to not get into too big drawdown.
So how can you prevent these kinds of massive losses from occurring in the first place?
Here are a few tips that will help!
1. Always use a stop loss
It’s essential that you always control the maximum amount that you’re willing to risk on each trade. If you don’t, losses may add up quickly and get you into those big drawdowns that are so hard to recover from.
So, what is a stop loss?
Basically, a stop loss is a stop order that’s placed at a certain distance away from the entry. As soon as the market hits the stop level, a market order will be issued and you’ll be brought out of the trade.
Typically you should place the stop loss so that you never risk more than around 2% of the account on every single trade.
So if you have $100, and buy one stock priced at $50, the farthest distance from the entry you should place your stop is $4, or at the $46 level.
Our complete guide to stop-loss orders covers this in much greater depth!
2. Start small
When starting out as a new trader, you should consider trading smaller positions to reduce the impact of the inevitable mistakes you’ll make as a beginner. This might mean capping the maximum risk per trade to 0,5% or even lower.
Then, as you gain more experience you may increase your position size up to around the 2% mark we just discussed.
3. Trade several strategies
Although it might seem hard to even find one strategy when you’re starting out, it still remains a fact that trading several trading strategies is a great way to reduce your risk level.
The reason is that different strategies tend to be uncorrelated, which means that their losing periods are not likely to occur at the same time. Thus, as one strategy produces several losses the other one might compensate by producing several winners, and the other way around. This creates a more even equity curve and is one of the reasons why we at The Robust Trader focus mostly on algorithmic trading, where we can trade as many as 100 trading strategies at the same time.
Another reason is that two separate trading strategies aren’t likely to fail at the same time. Even though most educators won’t want to tell you that all trading strategies have a limited life-span, that’s the harsh truth we’ll have to deal with as traders.
Final Tips for Beginners
Now we have covered some very important steps that you may take as a trader to increase your chances of surviving the game!
To round off the guide we’ll share some final tips that we know will help a lot as you’re starting out!
1. Always keep a trading journal
While keeping a trading journal might not sound like the most exciting idea, you should trust us when we say that it will help take your trading to new heights!
By keeping a journal with your mistakes, a log of your emotional state, and what went well, you can come back and analyze yourself and your trading results. Soon you’ll definitely start to notice patterns and aspects of your trading that need to be worked on.
In fact, for ourselves, the trading journal has been an indispensable tool in the continuous struggle of always improving and growing as a trader!
Not convinced yet? Then you may want to read about the ten benefits of keeping a trading journal.
2. Be Careful who you trust
The trading world is littered with false vendors that sell the dream, without even knowing how to trade themselves. Especially youtube is full of fake traders that promise riches to the masses if you just follow their specific advice. A lot of beginners tend to fall for these types of trading scams.
To trust a trading vendor, you, first of all, want to make sure that they trade their own money. Showing trades in hindsight can be done by anybody, and doesn’t prove anything.
A good thing to look out for is if they’re offering a holy grail. That is, the one single trading strategy that will bring an end to all losses, and let you trade happily ever thereafter.
If anybody makes such a claim, you can be 100% confident that they’re either a scam or use unethical methods to sell you their training material. Trading is hard and no trading strategy will last forever. That’s the simple truth that no trader, regardless of proficiency, can escape.
3. Take a course
Learning trading by yourself as a beginner can be a daunting task. And judging by the statistics, most people, unfortunately, are going to fail.
By taking a proper trading course, you’ll be on the right track right from the beginning, learning from people who already are where you want to be.
Of course, you should always do your due diligence before spending any money on a course. As we just mentioned the trading business is littered with people who want nothing but your money and offer nothing in return.
Becoming a profitable trader indeed is a big commitment that will take a lot of time, effort and energy. But for those who succeed, there is a lot of money to be made if you just keep a longer outlook!
We hope that this guide has been helpful and succeded to gather a lot of information that you would like as a new trader. Once again we’d like to mention our extensive guides listed below, which are great sources of information for those who are just starting out.