3 Things Every Beginner Trader Must Know
Hey Traders, Rishi Patel, co-founder of Master the Markets, Elite Traders Conference and The Traders Open Day.
On this video I want to talk to you about the three things that every beginner trader must know. Through our time of mentoring traders through the early phases on their journey in the financial markets we’ve come across a couple of things which we found are absolutely business critical for them to get up and running and make the very best start that they can.
The first thing we feel that is important to know and have on your horizon is that trading can be fully automated. Automation is really the first thing that you need to know about. What do I mean by automation? Well, when we place the orders, when we place our trades, we place them using a brokerage account. That brokerage account can be selected from any brokerage account that’s available. (Make sure you check out our other video on how to select a brokerage account.) But in the meantime, you need to look out for the automation feature. What that does is it allows you to place orders to open. So when it gets to a point at which the market has not necessarily traded at a certain price, you will look to get entered at that exact price. Let’s say, for example, you want to buy the market at 11015 and the market is just trading at 110, you can place what’s called a buy stop order on an automated basis to open. So you don’t even actually need to be at the computer. All of your orders, your entries, your stop losses and your take profits can be fully automated. So automation is the first feature that you can use to make your life much easier and it’s an essential tool that every beginner should really have on their horizon and should ideally be using as well.
The second thing is risk management. This is absolutely critical. When we teach in the Traders Basecamp over the two days we tell our beginner traders to repeat this three times; you must risk manage your position down to 1%. What do we mean by 1%? We mean that if you have, for example, a £20,000 trading account, that you actually look to only risk £200 of that. What this does is it keeps you safe and secure in the market. When you’re trading the market, you’ll position using automation and using a buy stop, an entry order, let’s say, to go long as well as a sell stop which can be your stop order, all of course automated, and you can use these orders to manage the risk between the actual entry and the stop loss. You can use the position size calculation – which we’ve probably explained in the Trader Starter Pack (for those of you who haven’t seen that it’s all on there) which will teach you how to do a calculation to risk manage this down to just 1% of your account. So you’re only going to risk £200 of your account’s capital on any given trade. That keeps you safe and secure in the market.
What’s the third thing that every beginner trader must know? The third thing that every beginner trader must know is absolutely imperative to give you an edge in the market. When we’re trading the market, we’re doing it very strategically. Remember it’s a mathematical game, a game of probabilities, and what we do is stack those probabilities in our favour. A good way of thinking about this is maybe if you are, let’s say, playing Blackjack. What you’re looking to do when playing Blackjack is you’re looking to risk manage first of all. Secondly you’re looking to stack odds in your favour. So if you have some kind of a strategy up front then you can actually give yourself an edge in the market. You can do that easily by having what we call a reward risk calculation. We can give ourselves an edge if we ask for a reward risk of 2:1 or better. What does that mean?
Let’s say, for example, we take 10 trades using our account of £20,000. Five of these trades we make money on and the other five we lose. What happens? Where we lose money we already know our maximum loss is £200. However when we make money in the market we’re looking for a reward risk of 2:1 meaning we would like to get double what we’re risking on the market. We’d like to get a return of £400 on each winning trade. Where we take a trade that loses, we lose £200 but if we gain, we’re up £400. So in this example of 10 trades, we win five of them and we lose five of them. When you add up all of the five losing trades you lose £1,000 (five losing trades of £200 each gives you a net loss of £1,000). But you also have net profits of £2,000 (five winning trades of £400 each gives you a net profit of £2,000). Where you take away your losses from your profits, you’ll end up with net profits of £1,000. Even though you’ve taken 10 trades in the market and five of them have been losses and only five winners – your reliability on that strategy was just 50% – but because you had an edge in the market with a reward risk ratio of 2:1 or better, you finished with a net profit.
These are the three tools that all beginner traders should know and have on their horizon:
- Automation which the broker will offer.
- Risk management down to a percent of your trading capital. Don’t risk more than a certain amount of your trading capital and for beginners we always recommend 1% risk. In the Traders Basecamp we ask all of our beginners to repeat three times ‘I will never risk more than 1% of my trading capital’ – this reinforces the thought and belief to make this work. That’s the maximum risk.
- The reward risk ratio of 2:1 – where we risk £200 we’re looking to make net £400 on each individual trade.
My name is Rishi Patel, co-founder of Master the Markets, Elite Traders Conference and The Traders Open Day and as we always say until next time, stay disciplined, follow your plan and Trade Like a Master.
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