Article Basics of Trading: Part 1

T2W Bot

Staff member
1,462 60
The Basics of Trading
I’ve had a long running thread on the T2W boards giving an introduction to the central themes of trading. This series of articles has been adapted from that thread and will take you through all the areas you need to get a start in trading, from chart reading to defining a strategy.
In Part 1 I will look at:


Basic chart reading

Money management

Exiting a losing trade

Setting a price target

Part 2 will then consider:

The importance of discipline

Paper trading

The trading plan


And finally, in Part 3, I will bring it all together by taking you through a simple trading strategy.

Basic Chart Reading
Ok let’s start with the basics of chart reading and deal with Support, Resistance and Trendlines. This really is the core basics of trading, and in my view is the foundation of a trading strategy.
How Candlesticks are constructed.
There are 3 types of bars that can be used for...
Continue reading...
 
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legalbeagle

Junior member
10 0
I've read this thread numerous times, and it's great to have the basic principles distilled into a succinct article like this which reminds us of the ground rules when we haven't got time to re-read the in-depth text books. It really helps you to see the wood through the trees. I'm looking forward to parts 2 and 3.

Thanks Mark, this is extremely helpful.

Legalbeagle
 

ale

Active member
108 1
All good stuff.
There is a fundamental question for the newbie which doesn't seem to feature in articles like this - what is the minimum amount of capital one needs to actually get into trading effectively? Once an allowance is made for trading costs (say £10 buying plus 2.5% stamp duty and then £10 selling) and you take account of the spread so you sell for less than you paid, you have to get over 5% growth just to stand still. If you then place your stops to limit your risk to 1% of capital and want to spread your capital over 3 stocks you are not going to be able to start with less than £10k. Or am I reading it wrongly?
Perhaps some well informed person could draw up a chart that explains this?
 

FTSE Beater

Experienced member
1,518 4
Hi Ale

I understand what you are asking, and I think the answer is to spreadbet. Your talking about trading and holding the actual shares, which could easily drain 5% of your account before you have even started. If you are trading UK stocks (the top 100 anyway) via spreadbetting, the only thing you will pay for is the spread which is a much more efficient way of getting into the market.

I hope this helps, but please feel free to ask me to explain it more clearly.
 

ale

Active member
108 1
FTSE Beater said:
Hi Ale

I understand what you are asking, and I think the answer is to spreadbet. Your talking about trading and holding the actual shares, which could easily drain 5% of your account before you have even started. If you are trading UK stocks (the top 100 anyway) via spreadbetting, the only thing you will pay for is the spread which is a much more efficient way of getting into the market.

I hope this helps, but please feel free to ask me to explain it more clearly.
Hi FTSE Beater.
Being new to this game I'm still trying to understand the differences in trading modes. Is the article more relevant to spreadbetting? Can you recommend a good article/book etc for the uninitiated.
Is there an answer to my basic question ie what would be the minimum capital to start trading stocks effectively using the 'rules' of the article? :confused:
 

millsy500

Well-known member
355 21
Hi Ale

Being a newbie too and i think in the same boat i'll give you my views thus far! (and prob be a complete t...)

I've been dealing with ig index who from what i can gather have the biggest spreads for eg i think about 10 to 13 pts on their indices so if you've got a small pot eg a £1 point its not worth thinking about. If your doing end of day as well like me and thinking of holding a postition for a few days then theres the added cost. Not much good again if your on a small pot. Don't know what the spreads are for uk stocks but then again theres not much volatility.(am i rite ftse?)
Then theres the stop limit thats hit on a daily bases. (back testing results!)
Summary- So far i think my formula is 2 years expierience x £5000 plus funds.

Millsy
 

the blades

Experienced member
1,336 275
millsy500 said:
Hi Ale

Being a newbie too and i think in the same boat i'll give you my views thus far! (and prob be a complete t...)

I've been dealing with ig index who from what i can gather have the biggest spreads for eg i think about 10 to 13 pts on their indices so if you've got a small pot eg a £1 point its not worth thinking about. If your doing end of day as well like me and thinking of holding a postition for a few days then theres the added cost. Not much good again if your on a small pot. Don't know what the spreads are for uk stocks but then again theres not much volatility.(am i rite ftse?)
Then theres the stop limit thats hit on a daily bases. (back testing results!)
Summary- So far i think my formula is 2 years expierience x £5000 plus funds.

Millsy
I suppose you can't really say how much you need up front until you know your system and its likely drawdowns.

A £1 per pt bet of the FTSE with capital Spreads would require £30 margin (£60 for £2 etc), plus the width of your stop (so 100 pts away would require a further £100) up front. So you could "play the game" with less than £500. But what's the chance of a long losing streak - how long is a piece of string.

Millsy - if you want to trade indeces, look at capital spreads - rolling daily is 2pts spread - you reveive interest if short and pay it if long for each daily rollover - no other costs.

Ooops.....not sure if this is the right place for this discussion though - sorry.

UTB
 

DaveJB

Experienced member
1,159 42
You can spreadbet for a few hundred quid easily - you are unlikely to make an absolute fortune, but you will be able to learn a huge amount THEN scale up. I was starting to type loads, but I think it'd be an idea to type a quick 'SB for Dummies' up and see if they'll add it to the knowledge base stuff - I'll go check if something like that already exists, if not I'll rattle a couple of pages of info off over the weekend.

I'm interested in this, and learned it all recently (well, 'all' is a bit of an exaggeration <g>). A lot of people, I suspect, want to trade but have small amounts to hand - I decided to learn how to spreadbet and just shoved £500 into an account and I've had months of fun with it. (I'm hoping to make a profit at some point too!) It's a cheap entry to trading, and if you are less impatient than I am you can avoid the costly mistakes... bargain!

I'll go check, if I can't find an article in the knowledgebase I'll have a go at it....

Dave
 

LOCOPERRO

Newbie
8 0
Go for it

DaveJB said:
You can spreadbet for a few hundred quid easily - you are unlikely to make an absolute fortune, but you will be able to learn a huge amount THEN scale up. I was starting to type loads, but I think it'd be an idea to type a quick 'SB for Dummies' up and see if they'll add it to the knowledge base stuff - I'll go check if something like that already exists, if not I'll rattle a couple of pages of info off over the weekend.

I'm interested in this, and learned it all recently (well, 'all' is a bit of an exaggeration <g>). A lot of people, I suspect, want to trade but have small amounts to hand - I decided to learn how to spreadbet and just shoved £500 into an account and I've had months of fun with it. (I'm hoping to make a profit at some point too!) It's a cheap entry to trading, and if you are less impatient than I am you can avoid the costly mistakes... bargain!

I'll go check, if I can't find an article in the knowledgebase I'll have a go at it....

Dave
Totally agree DaveJB I have wanted to trade for years but have not had enough money to do so properly 6 months ago I had some spare cash £150 which would just of gone on nothing in no time so I had a go at http://www.binarybet.com/ .I lost in the end but it took a while and I had great fun looking at charts doing the daily & hourly bets and I did learn and had the chance to apply the things id picked up in a more real environment with the thrill and fear of the game yet only losing £150.
Some may take a dim view of this and say it is not real trading may be not but it felt like it to me and it felt good not to be just reading about others trying and as I say £150 wont go anywhere if its going spare.
So I would be very interested to see what you have to say and any one else who has info on the way to play options spread betting forex futures shares day trading commodities with little cash or minimal cash. Some time some people just need to have a go if you don’t play you cant win ok so you don’t lose but maybe if you don’t play and lose you lose much more in years to come when you look back and say if I had only tried.
So I would like to see information along those lines even if it is under the title of almost gambling.
 

DaveJB

Experienced member
1,159 42
Okay, I'm on page 2 and will add to it when the Nasdaq closes....
Not one for high rollers, and definitely inclined to the light hearted approach, but there's a market for 'don't know much, and may never have much, but it'd be nice to have a go before death sets in' <g> It won't be definitive, it may contain errors, but it'll give a feel for what really involved in taking a very small pot and having a go at it from the amateur hour viewpoint.

Might have known Daniel would chip in <g>

Dave
 

Tombasium

Newbie
1 0
Ale,

In response to your question about initial capital investment, I did a few figures and came up with a couple of things. I started a couple of years ago with 7k which went up some, and I made two trades in particular that worked out well. First I just need to correct your figure for stamp duty, the rate is 0.5% not 2.5% (according to the LSE). Basically, it all depends (of course) on how much the stocks rise in value. At 1000 initial investment, the stock would have to rise by 3% to pay for the charges. Only at 5,000 would a 1% rise in value let you break even. So it really does depend on what you expect to gain.

As for spreading your 10k over 3 stocks, consider that carefully, as although it minimizes your exposure to charges, it makes for the effects of market fluctuations to be far greater over your whole portfolio.

I would recommend choosing five shares, with three of those paying large (above 3%) dividends. That way you cover your costs in dividends alone, assuming the stock price remains constant. Whatever changes in stock price after that you are covered for the initial five purchases at least...

As a rule of thumb, I use a minimum gain of 50 GBP on purchase cost (including charges) as an indicator that I have broken even on a share, as my largest holding is 3000 (and it immediately slumped 8% - grrr)...

As for spread betting? Sounds far too risky! Stick with compounded annual returns and the occasional potential high flier!
 
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