Welcome to this blog on 5 tips for a beginner trader!
PSA:
Allow me to start this post off with a friendly warning: I don’t think most people should “trade” in the traditional sense. Trading, whether it’s stocks, crypto, or any other asset, is incredibly difficult. The vast majority of people will be better off dollar-cost averaging (DCA) into their asset of choice (S&P 500, BTC, etc.) and playing the long game for consistency.
That said, there are a select group of people who may find trading worth their time. I’d argue that they’re not inherently better than anybody else but may simply have a deep passion for what they’re doing that gives them the drive they need to push through the increased difficulties.
At least, that’s the case for me. I’m also a lot more risk-tolerant than most people. I’m young, have lots of free time on my hands, little to no bills to pay, and have been studying personal finance, investing, entrepreneurship, and cryptocurrencies for years now. My unique situation allows me to experiment with a “business idea” that I’m passionate about but be completely ok if it flops on its face and fails. I’d rather figure out if I’ve got the knack for trading (or if I even like it!) now when I’m young rather than be wrestling with the “what if…” question later in life.
The reason I opened with this disclaimer is that I’ve seen from my years in the space that many content creators advertise “trading” as a way to get rich real fast, make buckoo bucks, quit your job and live on the beach, own a Lambo, or whatever other dream they’re selling you. The reality is, it’s not. Trading is very difficult. Yes, you can get lucky at times and make crazy money, but the odds are overwhelmingly against you keeping that money long-term, and you’re likely gonna lose it.
And that’s where most traders struggle: not losing money (and if you’ll recall, that’s Warren Buffett’s rule #1 in investing; rule #2 is don’t forget rule #1!). In trading, you’re making money off of other people’s emotions while learning not to let your own affect you.
So, if this trading thing is so hard and risky, why am I writing about it? Well, simply put, it’s something I’m interested in and studying right now. I thought I’d share some of the best tips for trading I’ve learned so far and some resources I’ve come across for the benefit of any other “nerds” who are as interested in trading as I am. 🙂
TL;DR: This post isn’t for everyone. Most are better off DCAing into the S&P 500. For the select group of people to who this post applies, here are the top 5 tips for trading that I’ve learned so far.
Tip #1: DO NOT trade with your emotions!
There’s a reason I’m listing this as my first top tip. It’s super important! And chances are, if you’ve been learning how to trade, you’ve often heard this. Many of the tips in this article and other principles that traders use are centered around controlling our emotions. We’re human, so we’re always going to have some emotion and bias involved no matter how hard we try to negate it, but there are still some very helpful steps we can take to reduce how much it influences our decision-making.
Many of us (myself included) find it easy to say, “Ah, that’s dumb, I’m great at controlling my emotions,” and then want to move on to the next step. But there is a huge difference between reading about the emotions of trading and actually experiencing them. As I reflected back on my big trading failures of 2021 I realized that a lot of my uncertainty at the time was because I had never experienced a euphoric bull market before (in crypto, specifically), and the emotions I felt at the time caught me off guard. Bear markets didn’t (or don’t) scare me as much because I started my crypto investing journey during a bear market. And while a bull market was a whole different story for me, I feel more confident today now that I’ve been through both types of markets in the crypto space.
Tip #2: Plan your trade, and then trade your plan
The better you learn to remove your emotions from your trading decisions, the more accurate, stable, and profitable those decisions will be. Without a plan or system to guide you, you’ll find yourself making stupid and rash decisions on the spot as the market changes on a whim. When you’re up 200%, you’ll want to hold onto the trade for longer just in case you miss more profit… but you’ll hold too long and then lose everything. On the flip side, you might find your portfolio tanking 50% or more and panic selling because you’re scared. So, to avoid all these issues, let’s dive into the following tips.
This was one of the first lessons I had drilled into me though I still have plenty to improve on here. This rule helps mitigate the issues of emotion influencing your decisions because you plan your trade before you’re swamped with the emotions of being evolved in the markets. So before you put on your real trade, plan it and put it in writing (that’s the part I slack on 😄).
Tip #3: Choose your system and stick with it
This sounds pretty similar to the previous section, but it’s a tad different. I think the previous tip applies more to a specific way to put on actual trades, and your system is what gives you the signal that a trade is available. In other words, your system is the set of trading rules, risk management strategies, and principles by which you live in the trading world.
After your system points out a trading opportunity, then you would plan your trade, and finally, you would trade your plan. At least that’s kind of how I’ve broken down the trading process for myself (yours could be different!).
Here are some quotes from professional traders who probably sum it up better than I can:
“For the 10% of traders out there, the lucky profitable ones; value and process is all we have to keep us from the other 90%. Our rules are our lifeline. If we deviate from those rules, we die. In trading we don’t have a luxury of a mulligan. You either trade with a process or you die without one.”
– Dan Shapiro
“By developing a series of processes and operating purely on their application, you have the ability to create good habit patterns whereby your natural reaction to unforeseen circumstances will be to follow your process and do the right thing. Consistent profitability can only come about by consistently applying a series of processes.”
– Bryce Edwards
This trader makes a very good point, but he calls it “an edge” and not necessarily “a system.” But I think his advice still definitely applies:
“Trading without an ‘edge’ is otherwise known as gambling. Having an edge and understanding not only what it is, but also why it works is non-negotiable, if you plan on becoming a successful trader.
– Luke Cummings
…The ability to identify and continually exploit an edge is what separates a professional trader from a novice. In the absence of a known edge, profitable traders are nothing more than the result of temporary good fortune.”
Deviating from your system due to an emotional reaction is what can quickly burn you. However, as Luke mentions, there’s merit in adapting your “edge” or “system” to fundamental changes that might reduce the effectiveness of your system (logical, rational changes, not emotional ones).
Tip #4: Cut your losses quickly
One of the resources I’ve linked to down below pointed out to me some flawed thinking I had about trading. I initially assumed that the professional traders won more trades than they lost (say like +70% win rate), but I learned that they might, in fact, lose quite often, but those losses are small.
So instead of losing 100% of their trade 3/10 times (which, with knowing what I know now, maybe too optimistic of a loss rate lol), they might lose 5% of their trade 5/10 times. However, on the trades they win they make back what they lost plus extra!
I’m honestly not quite sure what the average professional trader is shooting for win rate and expected ROI-wise, but the principle still applies. When you have a trade go bad, don’t keep it around in the hopes that it will recover. Just cut it off quickly and save yourself money. Granted, if you cut it off too quickly, you may shoot yourself in the foot… but that’s why I’d guess a roughly 5% stop loss seems reasonable (though it really is all a personal decision, this is NOT financial advice).
Here’s another quote that drives this point home well:
“A big “ah-ha!” moment for me was getting a grip on the concept of expectancy, and understanding how the basic mathematics of small losses countered by the occasional big winners, combined with a reasonable win rate, could work. I found out that successful trend followers could win over a long period of time, while at the same time they were losing on most of their trades — how good is that? A lot of people cannot grasp or accept this. They have a belief that, to win, they have to win more times than they lose.
– Trader Steve
…once I “got it,” accepting losing trades, or even a run of losses, became a whole lot easier–knowing that over the long haul the basic mathematical logic held up.”
Tip #5: Keep a trading journal
This tip is one that I threw in personally and that I haven’t necessarily learned from anyone particular educational source. In the summer/fall of 2021, I was playing a competitive ranked mode in a video game called Valorant, and one of my favorite things was keeping track of every single game I played (along with a recording) in a spreadsheet. After each game, I would jot down the outcome, my performance, and details about the game (the map, the agent I selected, etc.) and take notes on what I thought I did well and poorly on.
Was that overkill for a video game? Probably, lol (none of my friends do it). But did it help? I think so! Though for those of you who know Valorant, my rank actually didn’t improve all that much, but I’m chalking that up to a low volume of games. 😉
I think if I continued my game log while increasing the number of games I played, I would be a much higher rank today.
Anywho, back on track here. Gaming aside, this is actually one of my favorite tools I have used in a fun hobby that I want to apply to my actual work, and I think it will help a lot! If I’m tracking every trade, I make, what my plan is for that trade, and then what the outcome is (plus how I’m feeling at different stages and tracking my thought process), then even when I lose out on several trades in a row I have something I can reflect on to learn from… every single time!
That’s what turns hundreds of small losses over months or years into a full-on degree in trading.
Bonus: Cool Resources
This section is gonna be short and sweet. I just wanted to quickly link to some really cool trading resources I’ve stumbled upon recently!
- 20 Habits of Wealthy Traders
- Chat With Traders (website, podcast)
- The One Thing I Wish Someone Would’ve Told Me (pt.1)
- The One Thing I Wish Someone Would’ve Told Me (pt. 2)
- The Comprehensive Guide to Trading Mentors
Conclusion:
At the end of the day, I don’t claim to have extensive trading knowledge whatsoever (and none of this is financial advice!). This post is merely just a collection of some of my favorite lessons I’ve learned recently from the trading world as I’ve begun to dive deeper into the space to see what it’s all about. If I learn something later that completely invalidates one of the tips here, I’ll promptly return to update the post. Likewise, if I hit some home runs this summer as I’m taking this full-time, maybe I’ll write a part two and give some updates! 🙂
Either way, I hope this post has been somewhat helpful or encouraging. Enjoy the resources, and let me know how your trading journey is going!
