One of the most frequently asked questions we receive is how to learn trading. To start with, not like me!
Back then, I traded all kinds of strategies that didn't work, traded markets that, in hindsight, made no sense. The result was that not only did I lose money, but I also lost a lot of time and unnecessary stress.
That's why in this blog post, I want to go into more detail. You'll learn about the three phases of the learning process and I'll give you a total of five tips to increase your chances of success.
Phase 1 - Basics
This is the phase where you lay the foundation for successful trading. It's about understanding what trading is and what possible success factors are. At this point, I made a big mistake, which I want to prevent you from making. I thought I didn't need the basics, and that it was better to start with the strategy. But beware. Trading is a business. All advertising in this area makes it appear as easy as possible and conceals what you really have to do.
Tip 1 - Understand the goal of trading
Before you can be successful in trading, you must first understand what success mathematically means in this context. Simply put, we want to win more than we lose. And that's an important realization. We don't want or need to be right every time.
We want to be the casino that allows players to play, distributes winnings, but always wins over multiple repetitions, thus generating constant profits.
Successful trading can be expressed with a positive profit factor. The profit factor is a formula that expresses how much you risk on average and what you get in return. Never be impressed when someone says their strategy is 80% successful. This says nothing about the profitability of that strategy because we don't know how big the risk was.
So the CRV is missing, which is why looking at the profit factor always shows the whole picture. Remember: For successful trading, you always have to consider the probability AND the risk/reward ratio. In this example, we see that this results in a profit factor of 2.4. So if you risk an average of 1,000 euros, you would receive an average of 2,400 euros back, resulting in a profit.
Tip 2 - Why US stocks are the best choice
So now we know what trading is all about. It's not about being right. It's about making smart decisions that make us successful in the long run. But WHAT do we actually want to trade? I recommend US stocks. Why? Because for the following reasons, we can earn the most money there:
- There are significantly more stocks than on other exchanges. Therefore, there are enough stocks that move due to fresh catalysts every day. In trading, we depend on these movements to make profits.
- So if we focus on these stocks - we can make more profit than in other assets.
- Furthermore, we can only select stocks that have sufficient liquidity, so that we can increase our position sizes without increasing Risk.
This is why I prefer US stocks over all other markets. You'll soon find a more detailed video on this topic on our channel. Don't forget to subscribe.
In summary, there are simply more stocks in the US stock market, which means more capital is moving, which moves the stock prices of the stocks more, resulting in potentially higher trading profits. That's why US exchanges are simply better and more attractive for traders.
Phase 2 - Learning strategy
Tip 3 - Choose adaptive strategies & learn context
At the beginning, I made the same mistake that many beginners make. I bought ready-made strategies and lost with them permanently over time. What did I do next? I didn't change my behavior and went for the next strategy - hoping that it would work better and longer this time.
In hindsight, this way of thinking was very naive. Why should something work in the future if it hasn't worked several times before? At that time, I had problems getting out of this vicious circle because I wanted to reach my goal quickly. I wanted to copy the success of many others. But eventually, I capitulated and realized that I had to sit down and learn instead of wanting to copy strategies.
During my research, I quickly realized how a successful system must be built. The system must have clear rules for entries and exits, but at the same time, it must still be agile for future changes in market conditions. This means: We learn more about the environment and can then apply it in different contexts.
The right trading system is like your car: you learn to drive it. The context is knowing how to drive on different roads and when to take a detour to get to your destination differently - but better.
If you build this skill and learn to read the context, you'll be able to trade at your available times. The right trading system should work for every situation. So you should be able to trade with it for 2nd Day Plays, Earnings Plays, Daily Breakouts, News Plays, and so on.
Phases 3 & 4 - Backtesting and Demo Trading
Tip 4 - Journal setups and collect data
Backtesting is a big topic in itself. My recommendation is to combine demo trading with backtesting, as this allows you to gain practical experience directly.
The prerequisite is that you have a clearly defined setup and, on the other hand, a strategy for how to trade it.
The Multi-Timeframe System is our system of choice. This holistic system represents the big picture, which can be expanded with specific setups.
One setup that can be added to the Multi-Timeframe System is the so-called 2nd Day Setup. So we would trade this and at the same time enter it in a tool like Tradervue and tag it accordingly. Later, we can see exactly how successful this setup was in demo trading. If you make small changes to the setup, you can change the name and compare the two directly.
So we directly train our skills, collect data, and can better prepare for live trading.
Phase 5 - Live Trading
Tip 5 - Optimize risk management
So if we have a strategy that has been proven to work for us, it makes sense to trade it with real money. Here, the most important point is always risk management.
It doesn't matter how much you make if you lose everything again. Remember: Successful traders are good risk managers! What parameters should you consider here?
- Risk per trade
- Risk per symbol
- Risk per day
If you trade daily and start with an account of $5,000, and in demo trading have not lost for more than 3 days in a row, I would recommend a $150 risk per day. Why? Let's say you lose again for 3 days in a row and risk $150, then $450, or almost 10%, would already be gone. I try to adjust my risk parameters so that the maximum drawdown is less than 10% of my account, which would be the case here.
Starting from $150 per day, you can risk 3 × $50 per day if you make an average of 3 trades per day. If you make a maximum of 2 trades per day, $75 is also possible. Do you want to lose all of these $150 in one symbol or only half? You have the option to change these parameters.
Important: Never exceed your risk per day and have it insured with the broker to have external security against losing more on one day.