A Beginner’s Tutorial – Lesson 1: Prerequisites of Trading

  • By Tom Cleveland

  • October 15, 2018
  • 12:03 am BST

Warren Buffett once declared that to invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. I doubt if Mr. Buffett, who is in his eighties by the way, ever traded cryptocurrencies. He seems more like the value investor who buys and holds for a long period of time. But if he had, he would have likely admitted that controlling one’s emotions required a greater effort when trading in this medium, especially when it comes time to sell or exit a position.

Trading is not meant for everyone. If your authentic nature is overly stressed by this genre, then accept that fact and move on. There are various trader types and specific strategies employed by each style. You can even delegate trading to a professional or “mirror” the actions of a selected trader by having his decisions applied to your personal portfolio. There are many ways to participate in this space, but you must feel comfortable with it or it may be a waste of your time. In any event, even if you delegate the task of managing your assets to someone else, you will still need to understand the basics.

Trading has a vernacular that applies across all trading mediums. The first term you will surely encounter is “pips”. Conversion rates can include a number of decimal points, anywhere from two to four, sometimes more. A “pip” is slang for the last digit, sometimes a basis point, sometimes not. Gains are typically measured in pips. “PIPS” is also a simple anagram that you may use to remember the prerequisites of trading:

Preparation

Awareness is key to building a solid knowledge foundation. Once built, all other training can then produce effective results. It is important to immerse yourself in all things related to cryptocurrencies and trading. We can give you a basic framework upon which to build, but you will want to read as much as you can, seek the guidance of a mentor if possible, and enrol in a more formal training class, if and when you wish to graduate to the next level;

Information

Before entering a market, you will want to gather any “clues” that will give you that all-important “edge”. Anything that affects price behaviour is regarded as a “fundamental”. Technical Analysis will assist you in analyzing pricing data and will become your best friend. “TA” is the study of charts of previous prices that will help you to forecast the future direction of rates, but only to a degree. Software trading platforms will do most of the work for you on the technical side, but interpreting the various patterns and trends will be your responsibility. Good judgment evolves with experience;

Practice

There is no substitute for experience. “Free” virtual demo trading accounts were created with this purpose in mind. Practice on the demo account with the “virtual” cash provided before putting any of your real capital on the line. The two primary reasons why many beginners fail at trading are impatience and inexperience. Practice forming a strategy, executing trade orders, protecting against the risk of loss, learning when to exit positions, and locking in your gains.  Successful traders swear by their practice regimen. You will, too!

Strategy

You have to develop a disciplined approach to the market, execute by the numbers for buys and sells, and prevent your emotions from interfering with the process. There is a psychology to trading, and you can be your own worst enemy if you do not follow a fixed routine. Study up on the topic, and choose a trading style that mirrors your personality. Some veteran traders even profess to attach post-its of their step-by-step strategy on their computer screens for emphasis. For beginners, it is also wise advice to focus on only one trading item at first and not risk more money than you are prepared to lose.

Is this all there is to it? Of course not, but it is a start. Some veterans claim they have practised their strategies for months before “going live”. You must be able to act quickly and assertively, driven by a decision-making process that you have fine-tuned and habitualized during hours of practice sessions on your computer. Investments of time upfront will ensure dividends down the road!