Starting order?

Beginner Questions
1

Hello People,

As most of these first time threads start I have been ‘lurking’ on the forums/school for a while now, and been reading about trading for on and off two years (with large gaps).

I have recently changed jobs which has now allowed me enough spare cash each month to start putting some on one side to have a go (with the expectation of losing it all :cool:).

Seem to have settled on spread betting shares using capital spreads, using a demo account…I am planning to use the demo account until I have developed some semblance of a trading plan, kind of expecting to stick with the demo for the next 12 - 24 months (as long as it takes for me to gain more pips than I lose!)

Anyway, I have gone through the ‘school’ which has proved invaluable for explaining stuff from the basics up. My question is around the order to try and start to learn on a demo account.

As I am not actually risking real money I am putting the money management to the back of my mind for now, in preference focusing on getting on the correct side of a trade.

My plan of attack is this:

  1. Get the hang of placing support and resistance lines / stop losses / take profit;
  2. Get the hang of common chart patterns, such as rising wedge, etc;
  3. Get used to how chart indicators can support what you have read into a chart;
  4. Develop money management.

Does this sounds like a sensible order???

Finally, what granulatity should a trading plan go down into? I get the feeling that some people have clinical trading plans that almost prescribe where the stop loss and take profits should be placed based on things such as the risk to reward ratio…however to me it makes more sense to have an eye on risk v.s. reward (don’t risk £50 to make £2) but surly its makes more sense to stick your stop loss and take profit where you feel the chart is telling you to put it?

However this appears to be leaning towards an emotional/gut feel way of doing things which people are advised not to do?

Sorry for the long post!

Cheers
Ollie

2

Hello, Ollie

A couple of comments on your plan, and your questions.

[B]On money management.[/B]

It’s good that you are setting out a specific plan for your demo trading. Demo trading is practice trading, and the rule for practice trading (to use a sports metaphor) is “Practice the way you intend to play, and play the way you practiced.”

With that in mind, you should learn and practice good money management, right from the get-go. If you don’t, you will likely develop careless habits with the “play money” in your demo account. Those habits will embed themselves in your brain, and corrupt your live trading in the future. Why would you want to train yourself to take good trades with reckless amounts of money?

Suppose there were no demo accounts. Suppose you had to open and fund a live trading account in order to teach yourself to trade. How much money would you commit to such an account? That amount should be the starting balance in your demo account. Probably, your broker will not allow you to set the starting balance at that figure. But, you can (and should) train yourself to trade [I][B]as if[/B][/I] that were the balance in your demo account.

Suppose, in the scenario above — where there are no demo accounts, and you have to do all your practicing and learning with real money — suppose that you would be comfortable committing £1000 to a live account in order to see whether you could train yourself to become a forex trader. And suppose that you would not want to risk losing more than £20 on any one trade. Then, right from the start, you should begin trading that way in your demo account, whether it has a starting balance of £1000 or £50000.

[B]On indicators.[/B]

I strongly believe that you should ignore all indicators, until you have mastered the art of price-action trading. That means using market structure, market flow, time-and-price factors, S/R, fibs, pivots, and key price figures to tell you which pair to trade, which direction to trade, which time-frame to trade, where to enter, where to cut your loss (if the trade fails), and where to take your profit (if the trade succeeds).

I won’t even try to break that menu down to cover its details. That simple menu involves months of studying and practicing on your part. I will suggest that you become a student of Michael Huddleston, here on this Forum. Take a look at post #1 in his thread. And, if you decide to begin this study, get ready for the ride of your life.

If you master price-action trading, you will find that you don’t need indicators, with the possible exception of one price oscillator (stochastic, RSI, Williams % R, etc.).

Finally, your questions about how and where to place SL and TP orders will answer themselves when (1) you learn and practice good money management, and (2) you learn and use the price-action methods Michael teaches.

Good luck to you, and I hope to see you on Michael’s thread.

3

Hi Clint, cheers for taking the time on your response.

I heed your warning regarding money management, you are correct the demo starting balance was £10k…I have kind of been trading it as though it were £2000 although I have been a little more free and easy than I would be on a real account. Will tighten up on this as you suggest.

Two further queries around money management, if you take the simplest of advice that regularly gets bounded around of not risking more than 2-3% of account balance this means on a £2k balance you should not be risking more than £40.

>I have taken this to mean that my stop loss will not risk more than £40 on a trade, and not the value of the minimum margin required by the broker…this is typically much more than the 2% stop loss?

>Additionally I would be inclined to lean towards 2% per trade, not total open positions: example…would I break the idea of the 2% rule it I had two trades running at the same time:
Trade 1 stop loss: £40.00
Trade 2 stop loss: £39.20

As even though I am risking a compounded 4% of account balance across both trades, what’s the difference between this and Trade 1 hitting the stop loss, and then placing Trade 2?

I already had that thread on my to read/watch list, will defiantly check it out now!

Once again thanks for your help.
Ollie

4

You are correct. Your risk is the amount that you will lose if your SL takes you out of your trade.

If you limit your potential losses by correctly using SL orders, you can ignore margin (and never worry about receiving margin-calls).

The answer to this depends on [B]correlation.[/B]

If you open positions in the same direction (long or short) in [B]positively correlated pairs,[/B] your actual trade risk is the sum of the risks of these individual trades, because your two positions are likely to move together, toward your SL, or toward your TP.

Example: Long 1 micro-lot of EUR/USD with £40 risk [B]and[/B] long 1 micro-lot of GBP/USD with £40 risk = combined trade risk of £80. If EUR/USD moves against you and hits your SL, then it’s very likely that GBP/USD will stop you out, as well.

Here’s a homework assignment for you: Identify two currency pairs which are [B]negatively correlated,[/B] and figure out what combination of 2 positions in these pairs would double your risk.

5

So I cheated and looked up negatively correlated pairs, came up with:

EUR/USD v.s. USD/CHF

So if I shorted EUR/USD, and went long USD/CHF…bad times if USD weakens.

Those ICT videos are an absolute goldmine of info, already feel like I have taken a good step forward and only just finished the first 10 or so…knocked off all the indicators from my chart.

Trying to develop a trading plan that looks at previous days high/low, then use:

Fib
Pivot
Natural S&R

Then look for convergence of more than one.

Ow yeah and I am never risking more then 2% of what my intended start balance will be :slight_smile:

6

You are correct. In your example, if the the USD is the “driver”, then

B[/B] going SHORT 1 lot of EUR/USD and LONG 1 lot of USD/CHF doubles your gain, if the USD strengthens,

OR doubles your loss, if the USD weakens.

Also,

B[/B] going LONG 1 lot of EUR/USD and SHORT 1 lot of USD/CHF doubles your gain, if the USD weakens,

OR doubles your loss, if the USD strengthens.

Think about this: What would be your reason for taking either trade (1) or trade (2), above?

I’m glad to hear that you are progressing so well. Keep it up.

7

Hi Ollie,

Firstly, although you have been lurking awhile, welcome to the forum! The fact that you are here, and the kind of questions you are asking, both suggest that you have made a good start to your trading.

I won’t repeat the ground that Clint has covered - as ever, he is just plain right. Indeed, if ever I find myself disagreeing with something Clint said, my first instinct is to go over my data again and look for my mistake…

But to pick up on the closing point from your original post, the part that I have picked out in a quote above: there are many approaches to this, but personally I go for a fusion of the two approaches you mention. I have hard and fast rules which I won’t break regarding placement of SL, TP - I always risk 1% of my account balance, I always target a minimum of 1% profit with my TP, a few other factors, and I never deviate from them. Then I take that approach and I overlay it onto the current chart. I will only trade where I get a perfect combination: I look for a trade setup that suits my trading style, while also having sufficient ‘room’ on the chart to enable me to trade my regular R:R etc. So if I see what appears to be a perfect setup, but it requires a 63 pip Stop and there is a clear barrier to the trade just 50 pips away, I won’t take that trade. If there is not room for a minimum 63 pip TP to at least match the SL, then that is not a perfect setup for me, however great it looks technically.

So to use your phrasing, I do only ever place my SL and TP where the chart is telling me to put them, and then only if that still leaves room for my 1% SL/minimum 1% TP. Following what the chart tells me means that I am never trading against the chart, never forcing the trade, while sticking to my SL/TP rules keeps thing mechanical and stops me trading emotionally. For me consistent, mechanical trading of a reliable system is the key to long-term gains.

Hope that helps - but basically, listen to Clint!

ST

8

When Clint speaking for me personaly its like a personal handshake from Barack Obama :slight_smile: anyway thanks you Clint its allways a pleasure to read what ur writing

9

Thanks for the advice guys, I think it’s sinking in.

If I am to paraphrase, what you are saying regarding trading:

Stage one: use trading plan to identify an entry point
Stage two: chart analysis to define stop loss / take profit
Stage three: ensure SL / TP do not breach trading plan money management side of things

Three ticks for stage 1 / 2 / 3….into the trade you go!