Common Trading Questions (Trading FAQ)
When one decides to begin trading there are many questions that the prospective trader will need answered. Listed below are some of the most common trading questions that I get from new traders wanting to enter the field. It can be overwhelming at the beginning, and hopefully having these common trading questions answered for you will help you in your decision making process.
If you are just starting out, this is a great place to start. The rest of the site is dedicated to more experienced traders, where tactics, strategies, psychology, quality of life issues and trading plans are looked at to increase profits. Start here and seek additional information from the rest of the site as required.
If there are other broad areas which are discussed on this site, but you still have questions, send me an e-mail and I will do my best to supply the information on this page that you and likely many others seek
How Much Capital do I need to Trade?
This depends on the style of trading that you wish to do, where you trade, and also the instruments that you trade. Typically, to day trade stocks in the US you will need to maintain an account balance of $25, 000. You should start with at least $30,000 if you plan to make more than that 3 day trades per every trading week (more than 3 day trades per week will give you day trader status and you will be subject to the $25,000 minimum account balance). You can day trade other global markets without this account minimum. You should open a typical account with at least $10,000 if you are going to do other forms of short term trading or trader global markets outside the US. With smaller accounts than this, fees can become a very large obstacle to overcome. As the time frame for your trades expands, you will be trading less frequently, and fees become less of an obstacle and accounts can be opened with smaller amounts.
BUT, new products and markets have become available to the smaller trader recently that allow accounts to be opened for small amounts of money no matter what trading style or time frame the trader uses. Two such markets are the FOREX or foreign exchange market, and the CFD or Contracts for Difference market. Options, futures, FOREX, stock, and commodity trading through Contracts for Difference (CFDs – I will explain these in a moment) can provide margins up to 500:1. While this is an advantage to the smaller trader (because only a small amount of capital is needed), it is also a useful tool for seasoned traders who want to magnify their gains through the use of leverage not available in most markets. Remember, increased leverage means increased risk. Discipline is always paramount in trading.
A CFD is an instrument that mirrors a given stock (or commodity) price, moving cent for cent with it. Since the CFD is not actually a stock there is no commissions and no fees, you simply must pay the offer price to enter long positions and pay the bid price to exit long positions (using a fixed spread). You can also short any CFD at anytime. There are no downtick rules like you would find on certain exchanges. Not all stocks are tradable as a CFD, but you will have available to you over 150 stocks from different exchanges that you will be able to trade. You can also trade many global indexes, as well as gold, silver, oil and many other commodities using a CFD. Accounts can be opened for as little as $100 with Forexyard (they offer commodity and forex trading), which can give you up to $20,000 in buying power (or if you deposit $1000 up to $200,000 in buying power, etc). Safe guards are in place so you can not lose more than your original account deposit.
If you do open an account with Hot Forex, send me an email at firstname.lastname@example.org so that I am aware you have opened an account and can aid you more effectively with any questions you may have with the platforms or developing profitable strategies. You can check out this broker here: Forexyard
What Broker Should I Use?
Another of the common trading questions. Most likely you will want to go with a broker that will leave the most money in your pocket after each trade. Commissions and fees are the highest cost of trading, and thus they should be treated with respect. A small additional fee that one broker charges over another can add up to a large amount of money out of your pocket over time. So look for the cheapest broker depending on how you want to trade. Some brokers charge a flat fee, others charge per share. You will need to decide which is better for you (remember you can always switch down the road if things change) depending on your account size and trading activity. If your account is small and you will be placing small trades, probably paying commissions on a per share basis will be most beneficial. The flat fee structure provides greater benefit the larger the average trade size gets. Using an on-line broker will provide you with much lower fees than telephone or full service brokers, regardless of the structure they use to charge you commissions and fees.
Some brokers also offer additional features which can be worth a small increase in fees depending on what you expect your trading frequency to be. With certain brokers charts are provided as well as detailed stock screeners. These are tools that you will want to have no matter what broker you go through, and having them provided to you from a third party will cost you money each month. It is also advisable to be aware of the different that your broker will allow you to trade. While you may want to stick with only one trading instrument (most likely stocks), when you are starting out, as you progress you may want to have more trading instruments easily accessible to you. So, find a broker that offers the most for the least depending on how you are typically going to trade. Search the internet for on-line brokers that provide service in your country and then compare them based on the points mentioned above.
There are many on-line stock brokers offering many different combinations of fees and products, so I can not make suggestions as to which to use. You must base on it your own expected trading habits.
Interactive Brokers is a very popular platform amoung traders who make several or many trades a month.
Hot Forex is a great platform for trading FOREX, gold and silver CFDs. They offer excellent charts, for free, with loads of indicators. Stop order and entry orders can be customized. Customer support is available via online chat or by phone 24 hours a day.
If you do open an account with Hot Forex, send me an email at email@example.com so that I am aware you have opened an account and can aid you more effectively with any questions you may have. The account opening process is very quick and simple. You can check out their website here: Forexyard
Do I Need Charts, Level II Data, and Real time Quotes and High Speed Internet?
All traders should have charts. They can aid in market timing and provide many trade signals that would be totally missed without charts. As a day trading or swing trade (makes trade that last several days to a month or so) charts are essential as the chart will provide almost all your trade signals and exit points. Charts simply map the price path of a trading instrument, providing a visual reference to the trader of where prices have gone and where they may proceed to in the future.
Probably the greatest thing to come along since sliced bread is free-real time quotes. You can get real-time charts on our Real-Time Charts page (for free!) at the top, or you can go to http://freestockcharts.com.
Real time quotes are essential for the short term trader (day and swing traders). Since the time frame of holding the instrument is small, market timing and attaining the best price possible is crucial. Having real-time quotes can aid in this timing. Real-time quotes will also allow traders to take advantage of moves in fast moving stocks. The longer the time of the trades taken on, the less relevance real time quotes will have. Real-time quotes simply provide the trader with the second by second price movements of a stock. This data is usually paid for by the trader. If the trader chooses not to pay for real-time quotes or data, free quotes can be found on many different sites on the internet, but the data will be delayed by at least 15 minutes (the price showing on the site will be the actual price 15 minutes ago, and the real price right now could be much different).
Real time quotes can come from your charting software. And Freestockcharts.com does offer free real-time quotes.
As for high speed internet, once again short term trades will benefit from this. Day traders will require it. The longer time frame of each trade, the less relevant high speed internet becomes. Although due to the high volumes of information that can be used in trading, on all time frames, having high speed internet will help most traders in doing research, analyzing charts, and making trading decisions based that information.
How Often Should I Trade?
This should be set out by your trading plan. You should only trade when a valid trade signal is given by your plan. For a detailed look at trading plans and how to build your own, visit the Trading Plan section of this site.
If I Have a Strategy Idea How Can I Test it?
The safest way to test a strategy is through back testing. Back testing is applying the strategy to historical price charts and seeing if the strategy would have been profitable. No one can know how long a system or strategy will work as the market is always changing and technologies are evolving. Despite this I do feel that some back testing has a valid place among trading practices. Historical data and finding a strategy that works on it will not guarantee profits in the current or forthcoming market, on this I think most can agree. It is for this reason many traders do not back test their strategies, instead they do fly-by-the-seat-of-the-their-pants trading. This is where no real strategy is in place because they don’t want to test something on historic data but yet not enough information can be received in the moment to form a strategy let alone an entire system based on those strategies in the current market.
So, back testing can and should be used to help traders especially when they are starting out to come in with some kind of strategy that has worked in the past. This will at minimum be a starting point. The strategy, if it worked in the past, can then be tested in the current market through trading to see if it is still valid. The strategies that work can then be incorporated into a full trading system. Just to clarify, I view strategies as elements of a trading system and will change as some strategies no longer work and will be dropped and others will be added. The system or trading plan is how these strategies are executed based on each individual trading style, tolerances and time frames.
The use back testing is not to find validity for ideas, but instead to find flaws in the idea or approach. If you have an idea, look through charts to see if it would have made money up till now. While this can not guarantee that the idea will work every time or that it will work for an extended period of time into the future, you can at least come into the market with confidence that it is worked to a certain degree in the past. You are mostly looking to eliminate ideas that have never been able to create money in the markets. This alone will save you a lot of money because you can avoid certain losing strategies (very important when starting out when capital preservation is paramount). If an idea has not created profit (net wins – net losses, don’t just look for where you would have made money, you need to see where you would have lost it as well) on any chart including yesterdays then you should not enter into the market the following day using that strategy.
Approaching trading in this way will at least give you a starting point. It will allow you to find a few things have worked that you can use, and will also show you some things that you know have not worked and thus can avoid. The things that worked in the past you can test in the current market to see if they are still valid and then adjust them if they are not. All this information you can then use to formulate a system of trading that you will use in your trading.
Testing does not have be going through years of data, ultimately the time frame that you look to back test on while be determined by the time frame for your trades. If you a day trader, looking through intra day charts over the last month might be sufficient, if you are a long term investor you may want to back test your strategy over the last 20 years market history. Strategies don’t last forever that is why you need to take full advantage of the ones that still work and are valid. If something has worked for the past few months or over the course of the last several decades, it will probably work tomorrow and you can use it to make money. But if you never looked to the past to test that strategy you might not even realize it was there, or you might lack the confidence to apply in the markets tomorrow to make money. Knowing that something has worked in the past will also give a psychological boost to your trading. Trading needs to be done with confidence (not arrogance though), and being able to pull the trigger on a position when there is a set up to make money will require that confidence you attained from looking to the past and knowing that more often than not this strategy worked.
So, strategies will change and systems will also change occasionally to accommodate the current market and our personal situation, but by using what the past has shown us we can give ourselves some great starting points to making more money and avoiding losses as we become more experienced traders.
How Much Capital Should I Risk on Each Trade?
This topic is once again covered in the Trading Plan section of this site. In summary you do not want to risk more than 1% of your capital on any trade. You can use all your capital for one trade, but you must set a stop that will get you out of the position if 1% of your capital is lost. For instance, if your account is $30,000, you can buy 1000 shares of a $30 stock, but if the stock drops to $29.70 you must exit your position as you will have a loss of $300 outstanding which is 1% of your capital. This exit point is planed before the trade is placed. Also remember commissions, fees, and slippage should be taken into account when determining your 1% loss exit point. Losses do not have to be 1%, they can be much less, and as your account grows you will risk less on each trade relative to your account size. You may only want to risk 0.5% on any given trade once your account has grown.
What is a Trading Plan, and How Do I Make One?
This topic is covered in detail in the Trading Plan page of this site. In summary a trading plan should detail how and why you enter trades, exit trades and how you will manage your capital.
What is Some Good Reading Material to Get Me Started?
Check out the Trading Courses section of this site.
How Long Till I Can Make a Living From Trading?
One of the common trading questions which is most relevant to traders.
This will vary from trader to trader. The more time and effort that is put in, likely the shorter time frame to generate returns. It will also be dependent on whether you are trading full time or part time and the style of trading that you are doing. Your own expectations will also play a role, as earning a “living” can mean extravagance or bare minimums to different people. If you are quitting your job to trade and want to make it your main source of income, you will likely need at least a year to make this happen and in many cases even longer. If you adapt quickly, have a good trading plan and the discipline to stick to it, your road to profitability could be quite quick. Your starting account size is also something that will determine who quickly you can live off of your market income. The smaller the account the longer it will take, on average.
It Seems Every Trade I Get Into Goes the Other Way…
Every trader has thought this at some point in their career, and on occasion it does happen for periods of time. It has been reported that even some of the best trading systems will see up to 10 losses in a row. If this is true, then it is could just be that your system is experiencing a statistical event in which losses are consecutive as opposed to being dispersed between profitable trades. If this is occurring regularly or your account is dwindling quickly, you should make sure that a trading plan is in place which you are sticking too, and if you have such a plan it needs to be deeply analyzed to figure out why you are losing money. Most often it is not the plan but the individual executing the plan that is at fault. The trader is letting losses run and taking profits to quickly. The trader is being selective when their system gives them signals, often missing profitable opportunities because they trade (or do not trade) based on emotion and not on the plan they have laid out.
After you have reviewed your trading plan and conclude that it should be profitable, it is time to take a look at yourself and your own psychology for the source of the problem. If the trading plan should be profitable but is not, the only middle man between the plan and market is you. The Trading Mind Software by the Subconscious Trading Corporation offers a great tool which I use myself, and will aid you in this matter. In fact it will help all traders at all levels improve their performance. You can check it out at the link below. You may not want to pay for a product like this, but think of it this way – if this saves you one losing trade you have made your money back. And this software will save you money on losses, make you more money on your winners, and it will aid you in doing this over and over if you follow the advice.
Is It True that Poker and Trading are Similar?
In my opinion, definitely! Check out the Poker and Trading post for more info. In short, these two activities require very similar mind sets and personal qualities. Engaging in one will help you get better at the other and vice versa. Of course discipline is required in both.
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