The aim of this course is to help you appreciate everything you need to do and know before you execute your first trade. It shows you how to create the foundation that needs to be laid if you want to be active in the markets for the long term, and how to weather the many storms that will inevitably accompany your journey.
Before getting into the nitty gritty of what you need to know when you start trading, it is very important to have a think about why you actually want to go down this route. Hopefully it is not for one of the three Es: Easy money, Entertainment or Ego.
If you think there is easy money to be made here then you are mistaken. There are just too many incredibly intelligent people watching the markets full-time, meaning that if there were any easy money to be made, they would already have taken it. Trading for entertainment is also unwise. If you’re looking for a hobby that involves financial risk, look elsewhere. The odds on the horses and in a casino might well be better than in the markets, especially when you take all the broker charges into account. The third E is ego — if you trade to prove how good or smart you are then you are better off investing that cash into seeing a good psychologist — very few people with big egos are able to show the mental flexibility that you need to make money in the markets.
It’s much better if you trade because you want to have a career in finance, or because you are tired of paying financial advisors for bad advice, or perhaps because you want to see if you can make some extra income. With the right motivation, you can achieve a lot more than you think.
Unfortunately, trading for the right reasons is not enough; you also need to have the right approach to the markets and understand what is required to become a trader. That is why the aim of this course is to help you lay the foundations to be active in the markets for the long term, and to show you how to weather the many storms that will inevitably accompany your journey.
In the first part of this course you will look at markets and idea generation. Essentially, you can trade many different instruments, and Lex will take a look at some of these. He will consider examples from the stock market, currencies and gold. You will learn how to generate original ideas within each.
In the next part, Lex will discuss the two main schools of thought when it comes to analyzing markets — fundamental analysis and technical analysis. Lex will look at the pros and cons of each, and explain what he thinks the right approach is, and why.
The final part of this course looks at the importance of discipline and risk management so that you don’t blow your account up and have to stop trading. Lex will also discuss trading psychology, live trading, and how to select the right broker.
This course is unfortunately not going to turn you into a complete trader or investor. That takes a lot longer than a couple of hours. But what we can achieve is for you to get a very good feel of what is required to be able to make money in the markets.
This course draws upon a lot of material from Lex’s more advanced courses, so it will automatically help you decide which areas are most interesting to you and which courses you might possibly want to do next.
There are several types of traders and investors in the market. They each have their own strategy and time horizon. ‘Scalpers’ may be in and out of the market every few seconds, whereas position traders will generally hold an investment over several months.
Of course, the shorter your horizon, the more time you have to spend at your screen watching the market in case it makes a sudden move. This can be very demanding, although you will generally have more opportunities to trade.
If you have a full-time job, it may be impractical to be this involved in the markets. Swing or position trading styles might be more practical, requiring only a few hours of involvement per week.
If you do have the time to trade more actively, then you may still find the increased stress of active trading to be a challenge. This is why the decision you make needs to carefully take into account all the factors around you.
Hopefully, this course will get you thinking about the type of trader or investor you would like to become. Regardless of what choice you make, there is no ‘easy option’ and each approach requires dedication in order for you to stand a chance of making money.
Whether you go on to trade stocks, bonds, currencies or commodities, it is important to know who else is active in the markets either as competition or because they try to sell you a service. It is important to be aware of their objectives so that you can outsmart them and not end up being the well-known fool at the poker table.
There are several key players in the financial services industry, or The City as it is known. Banks, brokers, asset managers and professional speculators like hedge funds are all active in the market, buying and selling securities amongst one another.
Most of these parties will be investing in stocks and bonds, although currency markets also play an important role.
At this point, Lex will mention a number of things that both novice and experienced investors should be mindful of.
The first is that stock prices are influenced by the state of the economy. As companies sell more during upswings in the economic cycle, their earnings grow and stocks become more attractive investments. Stocks generally perform poorly during economic downturns, although some companies are more resistant to this, as you will see later on this course.
Don’t forget, it is foolish to assume that any company will be around forever. Today’s leaders could be bankrupt years from now due to poor management and a failure to adapt their model as demands change.
The skill is in identifying the right companies for the current stage of the economic cycle, and being prepared to adapt your portfolio as conditions begin to change. Stocks are there to make you money, and there is no reason to become attached to a particular company just because you like their name.
So there are quite a few different markets that you can trade, and possibly specialise in. They each have unique fundamental drivers, but the one thing they have in common is a need for original ideas if they are to be traded profitably.
It really is essential that you develop your own beliefs and trade ideas. This means not joining the herd, and often going against popular opinion. Human instinct makes it really difficult to resist following the crowd, especially during periods of sharp moves in the market when everyone else is selling on fear or buying on greed. Successful investing means that you must have confidence in your own convictions, and having your own ideas will make this a lot easier. In the long term, allowing yourself to be shepherded along with the sheep will normally not be as profitable as making your own choices.
On this note, Lex will go on to look at some of the sources you should avoid!
Following tips or systems you may have found on the Internet is often a mistake. People advertise trading systems as the ‘holy grail’ alongside outrageous claims of 1000% returns and millions of dollars in potential profits. Bold guarantees are also advertised, which are incredibly unrealistic in an industry where, as the saying goes, «uncertainty is the only certainty there is.»
When presented with such claims, stop and ask yourself this question: if anyone were actually capable of making all this guaranteed money, why would they bother setting up a business to sell it?
Even if there are some profitable suggestions, there are so many bad ideas out there you will never know how to separate the useful from the useless. If you traded every idea you would most likely blow your account up in the process. If you routinely follow tips, your performance will suffer.
One of the first things you learn as a professional is to ignore all the opinions and general market noise and come up with your own ideas.
Lex will then cover the two common techniques for generating ideas. The first is top-down decision making. Here, you start looking at the state of the overall economy, or identifying an investment theme and then finding potential trades that fit within that view. The second is bottom-up, which means identifying good companies and then doing research to ensure that they indeed really are good quality investments.
These approaches often meet in the middle. If you are bullish on the economy and find a consumer stock that might benefit from a growing economy, but then find out that the management is corrupt, you obviously won’t invest.
Equally, you may find a great company but if higher interest rates would have a hugely negative impact because it has already has a tonne of debt, you probably don’t want to invest there either.
Top-down idea generation is applicable to all asset classes, especially currencies. Here, you are attempting to anticipate the consequent change in countries, industries or even single stocks as a result of the macro economic backdrop. Traders often refer to these as ‘themes’ from which their ideas are generated.
For example, you may have an opinion on the economic cycle. Do you have a view on which stage we are currently in? Or have you recently heard about shale gas and the effect it could have on the US economy?
Alternatively, you may have noticed how wars are becoming increasingly high tech and less reliant on soldiers to fight the battle. Finally, perhaps you look to emerging markets to determine whether you should be investing in commodities or related currencies?
In the second part of this course, Lex will mostly focus on the two main schools of thought when it comes to analyzing trading ideas. Essentially, there are two principal ways of approaching the markets, either on a fundamental basis or a technical basis.
Of course the market does not always do in practice what you think it should be doing in theory. That is why Lex will also have a detailed look at the drivers of currency markets to see if you should possibly change your trading style when the market does not quite do as it should.
Assessing the fundamentals of a currency really means looking at the fundamentals of the relevant country’s economy. Currency investors focus on the fundamentals of a country’s economy to determine whether their currency is likely to appreciate or depreciate in value.
This includes things like the size of the economy, and its rate of growth measured by Gross Domestic Product, or ‘GDP’. The level of unemployment is also key, as it determines productive capacity and consumption in the economy. Interest rates are another vital component, and have a strong influence on a currency’s value.
Technical analysis is based on the belief that all known information about a stock, or anything else, is reflected in the price. Looking at a price chart on your screen tells you everything you need to know about the history of the stock, so some fans of hardcore technical analysis would suggest that there is no need to go over the fundamentals.
Based on this, technical analysts use charts to predict future prices by drawing conclusions about the future based on the behavior of a stock in the past. They also try to identify well know recurring chart patterns and use so-called price-based indicators to measure strength or weakness.
After this, Lex will spend some time discussing trading psychology. No matter how good you are at trading on paper, trading in practice is a lot harder and the market will find all your weaknesses and exploit them. Experienced traders often say that controlling your mind is key to trading success, and Lex agrees.
The final area of your trading that requires discipline is risk management, to make sure that you only risk what you can afford to lose and don’t overexpose your portfolio to one single theme.
The goal of risk management is to ensure that you never lose so much that you have to stop trading. The aim of the game is to always be around to ‘trade another day’ and capitalize on future opportunities. If you are out of money, then you are out of the game, and you will have to let future opportunities pass you buy.
Hopefully this course will give you some great insights into the risks involved in trading. If you are not very careful, you can lose all your money very quickly. For this reason, it’s much better to trade on paper before you risk real money. By this point in the course, you will also be very aware of the importance of trading psychology and controlling your own mind. If you can stay calm when others are losing their head, you can make a lot of money! Good luck!
How to Become a Trader and Investor
How to Become a Trader and Investor Part 1 (48:42)
How to Become a Trader and Investor Part 2 (21:41)
How to Become a Trader and Investor Part 3 (30:06)