Topic: Trading 101 Series (for newbie traders) (Read 679 times)

Thank you, sometimes i really do feel like a fish out of water, and love it when people take the time to explain things.

Nice read so far I'll be following!

---------------------------------------------------------------
Introduction
---------------------------------------------------------------

I've been asked many, many times for investment and trading advice or how to stay on the winning side of the market. The truth is, it's not easy... at all! There's no such thing as a "sure thing" or a "free lunch" in the market. Many Wall Street veterans are often heard saying something to effect of "99% of traders lose money, 0.99% break-even or make a little here and there and the last 0.01% know what they're doing". In my experience that seems about right. The road to trading success is long and treacherous!

People are often disappointed when I can't tell them what that "magic" stock is that will make them lots of money. I'm sorry to disappoint, but there is no magic stock or "perfect investment" out there. Being successful in the market is very difficult and requires a lot of work. Even the most seasoned traders lose money... and they lose money often. The difference between the "crowd" and the "smart money" is that the successful traders' losses are very small, and their gains are quite big; at the end of the year, they may have lost on more trades than they won, but their few winners outweigh the losers by a wide margin. But how do they do this? The answer is that it's less about "stock picking" than it is about strategy.

This is what I'm going to try to teach you through my little experiment. Here's how it works... I'm going to write a series of articles about trading, and try to teach you the strategy, risk management techniques and tips/tricks which are largely responsible for my personal success as an individual day trader. These articles will be completely free for everyone to read and learn from. There's no signup or registration, no membership dues, no subscription fees and no obligations whatsoever. Instead, I will use an experimental "pay what you want" model based, of course, on Bitcoin. If you like these articles and feel they help you then I hope you will throw me a "tip" to not only keep me writing and teaching but to encourage me to do so more frequently and with more enthusiasm and effort.

I don't claim to have some super secret system or "insider knowledge"; it's just commonsense strategy, math and logic. But it's also difficult to master, like learning to play the piano or how to do a backflip on a motorcycle. And perhaps the hardest part of it all is learning to control your own emotions. So it's not easy, and I'm not going to kid you. However, if you have the time and money to trade and you're willing to put in the effort I'm quite confident you can learn this stuff and succeed in the market! Let's begin...

---------------------------------------------------------------
How does one begin trading?
---------------------------------------------------------------

The Capital

This article will start with the basics of the basics... hence the name "Trading 101". So let's start somewhere obvious: How does one begin trading? The first thing you need, of course, is some money! But how much money? There's not necessarily any specific answer to how much money you need to start, and it also depends on what you're going to be trading. Generally, I suggest a bare minimum of $1,000 to $2,000 USD to open your account, and $2k is also the minimum if you want a margin account or access to more sophisticated types of trading. For a simple cash account, most retail brokers have a minimum of around $500 USD. You can trade some options with a couple hundred bucks, but you will quickly find that the going is tough. Here are my suggestions for the absolute bare minimum amounts of money you need for various types of trading (these amounts, however, are probably insufficient for most people):

• Equity (cash)            --    $2,000.00
• Equity (margin)         --    $3,000.00
• Options                    --    $1,000.00
• FOREX                    --    $500.00

I cannot stress enough how important your capital is. A trader without capital is like a butcher without a knife or a soldier without a gun -- you lack the critical implement of your work. Starting with enough capital is one of the most critical things for new traders. When you don't have enough money to begin trading you will run into several problems. The most obvious problem is commissions -- they're a hurdle for all traders, but a bigger one for small traders! Brokers will charge you some sort of fee to serve your trading needs -- it's how they stay in business. Most retail brokers charge you a flat, fixed fee per trade. For instance, Scottrade charges $7/trade, TD Ameritrade charges $9.99/trade and other brokers have their own rates.

Let's consider TD Ameritrade's commissions as an example. You are charged approximately $10 each time you place a trade to buy or sell an equity (stock) or an equity option (stock option). So it will cost you a total of $20 to make a complete "round-trip", such as buying a stock and later selling it to "cash out" and take your profit or accept a loss. But think about this: If you only have $1,000 for trading and you know you're already down $20 as soon as you open a position on any stock, that means you'll need a 2% move (in your favor) just to break even! This means that if you buy 100 shares of ABC at $10 per share (net value of $1,000) you will need ABC's price to rise to $10.20/share just to break even when you sell it! That's no fun, is it? With such small amounts of money your gains will also be quite small: a big, juicy 10% move in ABC stock would only gross a mere $100 profit, but the actual net gain would only be $80 after commissions. Having enough capital for trading is very important, because an under-funded account is hard going. Consider that same 10% move in your favor, and you had $1M worth of shares rather than $1,000 -- your net gain would be around $100,000! That's how big of a difference it can make. If $1,000 is all you can muster though you can make it work, but it's much harder. Per-trade commissions also build up the more you trade, so you will be stuck holding onto stocks for much longer periods of time to ever see anything interesting. Trading with too little money is difficult and frustrating!

But there are more problems with the bare minimum approach... If you only have $1k in your account you're pretty much stuck with only trading one, single stock (splitting up your money would make commissions too much to bear). This means you cannot diversify and reduce your risk. You're either "all in" or completely out of the market, and if your one stock goes down the toilet you're screwed. But this is where the government and regulations come in to protect you, right? Ha!

As a "little guy" in the stock/options market you will also face another significant headwind: FINRA Exchange Rule 431, commonly referred to as the "Pattern Day-trader Rule" or "PDT rule". In short, this rule states that any account which makes more than 3 intra-day round-trips (openining and closing a position on a stock in the same day) within a 5 business day period becomes labeled a "Pattern Day-trader's account". And the rule goes on to specify that all PDT accounts must have at least $25,000.00 in equity to continue trading. If you don't have $25,000 then you will be "frozen" and unable to open any new trades for 90 days, or until you bring your balance up to $25k+! This rule is supposedly to "protect" you because they think you are "unsophisticated" and, well, stupid... but I say it's nonsense. It's not only nonsense to assume that the size of someone's account indicates how smart they are but also nonsense to claim this "protects the little guy" when it actually gives a huge advantage to institutions and professionals (they can get out of a trade gone bad anytime they want -- you can't). But if you're new to the market and have less than $25k to trade on then get used to it... there's no way to avoid this rule, other than getting your balance above $25,000. If you turn out to be an excellent trader, however, your balance might reach $25k+ faster than you think. Most people are not that successful, but it certainly can be done.

The Account

Assuming you have enough money to begin trading, all you need is a brokerage account. Getting a brokerage account is not that difficult. You just need to choose a broker, fill out the paperwork or online application (self-explainatory), show some ID and throw in your funds. Each broker is a bit different, but they're all pretty easy to work with. I opened my first brokerage account when I was a teenager and knew very little about the markets, so I know you can do it too.

But what broker should you go with? There's no right or wrong answer to that question. You just need to pick one you believe suits you. Some of the most popular retail brokers are:

• TD Ameritrade
• eTrade
• Scottrade
• Charles Schwab
• Fidelity

For absolute beginners who don't have much money I suggest Scottrade. Not only are their fees cheaper than most competitors (only $7/trade vs. around $10/trade) but their software and website is easy to learn/use, they have good support and there is a good community forum. In my experience the people at Scottrade were always warm, friendly and helpful; they even sent me gifts on my birthday and Christmas! If you think you might want to become more serious about trading or do it full-time then I'd suggest going with TD Ameritrade. Their tools and services can cater to professional traders, and you can have access to their amazing ThinkOrSwim platform which lets you trade stocks, options, futures/commodities and FOREX all on the same platform. TD is a pretty darn good broker, if you ask me. But the other retail brokers are also good, and I suggest you look into all of them and choose the one you think suits you best.

Once you have your account setup and funded you are ready to begin trading! Again, it's all pretty simple stuff... it's about as easy as opening a checking account at the local bank. So don't be intimidated or think that personal brokerage accounts are something for the wealthy and "financially sophisticated" -- it's not! Virtually anyone can open a brokerage account to trade or invest in some stocks. And we will soon be learning how to use a brokerage account to start making a bit of money on the side, or perhaps make a living at it as I have done.

---------------------------------------------------------------
Conclusion
---------------------------------------------------------------

Today we've learned about what it takes to open a brokerage account and how easy it can be, and we also learned a bit about the different retail brokerage services out there and how their fees compare to one another. All that's left is for you to do a bit of homework on these brokers and decide which one might be right for you!

Hopefully I've explained a lot of the challenges you'll face as a newbie trader, especially if you can only afford to open a small acount, and how important your capital is in trading. It's not easy and it's not for everyone. And as you've heard before, trading is risky and you can lose money doing this -- if you try to treat the market as your personal casino I can almost promise you that you will lose, and you will lose bad. Gamblers always get punished sooner or later. Before you ever consider trading with real money I suggest you try out a stock simulator like Investopedia.com's free simulator.

Using a simulator will give you a chance to experiment with the mechanics of trading and get used to the "feel" of the market without putting any real money at risk. I suggest you practice for a while until you feel comfortable with your strategy and know what you're doing. But remember that a simulation is not real trading, and what works with "paper money" may not work for you with real money. When real money is involved you will start feeling very real emotions which can influence the decisions you make -- and can often lead you to your own destruction if you cannot manage them. Learning to control your "money emotions" (especially greed and fear) is about 75% of the battle.

I could've crammed a lot more information into this article, but I didn't want the very first beginner's-level article to be too long and complicated, so we will stop here for now and soon pick up where we left off. If you have any questions on any of this please feel free to ask and I will try to answer you as soon as possible!

Coming up next...

The next article (Article 02) will be on "The Basics of the Market". We will learn about the way stock exchanges work, how orders are placed, the different types of orders and how orders are executed. We will also learn about reading stock quotes, and understanding terms like "bid", "ask" and "last". Furthermore, we will soon be discussing things like average unit cost, gross vs. net gain/loss and learning a little basic financial math and vocabulary.

For you more intermediate/advanced folks craving some additional knowledge or insight into the markets, fear not: we will be discussing more advanced topics, from the futures market to FOREX, and from arbitrage to spread trading, quite soon; provided there is some demand for these articles.

If you would like to suggest a topic please feel free to do so and I will try to get around to it if I feel it will help a good number of people. You can also place a Bitcoin "bounty" on a specific topic or analysis of a specific market or security to encourage me to hurry. :-)

Hope you enjoyed and learned,

--ATC--

If you enjoyed or learned from this article, or want to see more, please show your support and send a tip! I will guage the demand and appreciation for these articles by the amount and frequency of tips -- it's basically a way of saying "Thanks, please write again!" to the author. There is no minimum or maximum amount, and it is not required that you do it at all. Tips may be sent to this Bitcoin address, so that I may keep track of the support/demand for trading articles:

13M9QLc5BDQe2iuB1N3Br58fYvJF5ixihT

I hope folks enjoy this experiement! :-)

I am trying out a new, experimental business model based on a free trading/market blog. The idea is that I will write articles I feel will be useful to aspiring and experienced traders, developers and the Bitcoin community in general. It's all based on the "pay-what-you-want" tip jar model... I encourage people who like the articles on the site to throw in a small tip as a "thank you" and encourage authors (currently just me) to create new content. You can find our new website (currently a working prototype) here.

http://www.epiccoinage.com

You can see the blog here, of course, or by clicking the "Blog" tab in the main navigation menu anywhere on the site. The first thing I'm working on is a series called "Trading 101", which is written with newbie traders who want to get into the market (stocks, options, etc) for the first time. It's an educational series, and I'm starting with the essential basics of the basics and building upon each lesson. My goal is to teach people with absolutely no prior knowledge or experience in the markets how to start trading successfully (or at least without failing before they have a chance to learn from their mistakes).

I'd really like to receive some peer review on my writing and some ideas on what you'd like to see in this series (and what future articles you'd like to see) and how things can be improved. So please check out the article and tell me what you think!

If you enjoy it or feel it is helpful you can throw some change in the "tip jar" using this address:

13M9QLc5BDQe2iuB1N3Br58fYvJF5ixihT

Thank you for your time and support! 

--ATC--

P.S. :: Going to make another post containing the full article so it can be viewed here without visiting the site.