If you’re reading this article you’ve probably had a screenshot of someone’s trading profits (maybe mine) float across your timeline. With apps like Robinhood gaining in popularity, it seems like everyone is a trader these days, or at least interested in it. As a result, I’ve decided to put together this beginner’s guide to answer questions, provide resources, and outline some important principles. While all of this information is readily available online, it’s hard to find one comprehensive resource. My hope is this will be just that!
Trading has a long history, starting from our ancestors trading a goat for three chickens all the way to the establishment of the United States’ first stock exchange in Philadelphia in 1791. The way we trade has changed but the core principle has remained the same: make a profit! Admittedly, this is easier said than done. Trading, just like any other skill (and it is a skill) requires studying, practice, and a series of trial and error. I’m 18 months into my journey and have just recently arrived at the point where I’m profiting consistently.
“Trading, just like any other skill (and it is a skill) requires studying, practice, and a series of trial and error.”
The number one question I get is where do I start/where can I learn. My answer is generally the same: Babypips.com. While the site is primarily dedicated to foreign exchange (trading currencies), their School of Pipsology is perhaps one of the best online resources for new traders to learn the basics. Their courses range from Preschool (What is Forex?) to Elementary (Support & Resistance levels) to Undergraduate (Creating your Own Trading System). Creating an account will allow you to track your progress to graduation. You will not find a more comprehensive and engaging website, and IT’S FREE.
Now depending on who you follow, you may be familiar with a variety of markets: stocks, options, foreign exchange, and cryptocurrencies (to name a few). Each market has its own advantages and disadvantages. For example, forex is generally less volatile with limited profits. Options, on the other hand, are extremely volatile and risky but can produce larger returns. By contrast, the cryptocurrency market is open 24/7 while the stock market closes at 4:00. The choice is yours what market to trade; I recommend exploring them each.
“Each market has its own advantages and disadvantages.”
Inevitably you may get bored with studying theories and will want to interact with the live market. The next resource I recommend getting familiar with is TradingView, an online platform for charting. The use of charts in trading is known as technical analysis as you’ll be analyzing the historical chart of stocks and currencies in order to make predictions about future prices. TradingView has a free version that allows you to practice charts without ads. They also offer another cool feature: Paper Trading. Paper trading, also known as simulated trading, lets you trade with “fake” money in order to practice buying and selling in order to build a simulated portfolio and increase confidence.
Let’s say a couple of weeks have gone by and you’ve completed your Babypips courses, chosen a market you want to trade, and grown your paper trading portfolio from $1,000 to $5,000. Now it’s time to put your money where your mouth is and start trading (I personally use Robinhood for trading stocks or options and Binance for trading cryptocurrency). But, before you get started, there are a few important principles that every trader must follow for success:
- Manage your risk! Proper risk management is perhaps one of the most important principles as it’ll save you from wiping out your account (something I’ve seen happen to even the best of traders). This means not loading up your account with your savings and betting the farm on Uber. In other words, don’t put all your eggs in one basket! Most gurus recommend only putting 5% of your trading account into one position. I usually do 10% but each trader has their own risk profile and preferences.
For example, let’s say you fund your trading account with $1000. If you think Uber is going up and want to start a position, you would only want to allocate $50-$100 on that trade. If it goes up, you’ll make a decent profit. If the trade goes bad, your loss is limited to 5–10% of your portfolio. Speaking of losses…
- Set a stop-loss! A stop-loss order is an order placed to buy or sell once the stock reaches a certain price and is designed to limit an investor’s loss. This can be an actual order or a mental commitment to cut at a certain price.
For example, if you buy a stock of Uber is $50 because you think it will go up, how much are you willing to lose before you cut that position? Stop losses vary between traders but 5–10% is a good general number. In this case, let’s say you decide that you will exit your position if Uber goes under $47. At most you will only take a 6% loss on the trade and only .03% of your total portfolio.
- CUT YOUR LOSSES! This one was so important I had to use caps lock. I shared a tweet recently that shows a position where I took a 94% loss for -$122. My original plan was to cut it if it went down 25%. Had I stuck to my plan I would have saved myself from losing over $90. I would have more money today if I would have learned this lesson sooner!!!
- Have a plan! Imagine getting in a car and driving with no destination in mind. That’s how a lot of beginners trade the markets with no target price in mind and just hoping for the best. Each trade you take should have 1) an entry price 2) a stop loss and 3) a target price. Having these three things and a little bit of discipline will save you money and heartache!
Due to the interest of time, I’ve overly simplified many of these principles, so I highly encourage you to research them individually for more understanding.
The second most common question or request I get is for books, videos, and other resources, so I’ve done my best to compile a list of my favorites:
Trading in the Zone by Mark Douglas — This book is all about one of the least talked about but most important elements of trading: psychology. It’s easy to paper trade but when you have real money on the line it’s common for fear, doubt, greed, and uncertainty to overwhelm you. This book will help you get your mind right and find your edge when it comes to trading the market.
Technical Analysis of Financial Markets by John Murphy — This book is an oldie but goodie. It serves as a comprehensive guide to trading methods using technical analysis (mentioned above). I tweeted the most relevant chapters.
Chat with Traders — This is one of my favorite podcasts to listen to as the host interviews traders from all walks of life about how they got started, how they found their edge, and how they became successful traders. As you listen, you’ll see that there are a variety of strategies, risk profiles, and beliefs. One thing they have in common: most started out losing money before winning.
YouTube — This recommendation comes tongue in cheek, but I’m being very serious. I have watched hours of content on all topics from technical analysis to how to use TradingView and Robinhood to recognizing chart patterns. Some are good, some are bad, but there’s no teacher like YouTube University!
I hesitated to add this to the list because there is just as much bad information on Twitter as there is good information. I’ve learned a lot from following other traders and was able to create a network, but for a while, I also got dependent on their calls and ideas instead of formulating my own. Every trader has their own risk tolerance, stock preferences, time frame, etc.; it’s important that you work to develop your own system and limit the amount of external influence.
In conclusion, it’s impossible for me to teach anyone how to trade with one simple blog post as trading is mostly a solo journey. The purpose of this guide was simply to introduce you to some new ideas, resources, and terminology. Ultimately, it’s up to you to act on and use the resources strategies, and tips I’ve laid out. But if you do so, I’m confident that you can become a profitable trader with some time and effort. Trading is exciting and can be lucrative when done correctly. I wish you all the best, and I’ll see you in the market!
If you made it this far, I just wanted to personally say thanks for reading! You can find my other guides like A Beginner’s Guide to Buying Bitcoin on my profile. Every underlined word in this guide is a hyperlink to a website or tweet. Speaking of Twitter, you can stop by and say hi at @BitcoinDunny.
Lastly, these articles, while short, do require a significant amount of time for research, writing, and proofreading on my part. If you found this beginner guide to helpful, feel free to show your appreciation with some money at:
Robinhood also has a pretty cool referral program. If you don’t already have an account, use this link to sign up and we each get one free stock like Ford!