Hi 9jaCashFlow fan, I welcome you to this training on Margin Trading, which is going to be straight to the point and well explanatory.
If you do pay attention, I promise you will learn a lot.
What you need for the training
1. Basic understanding of Maths
2. A platform to do leverage trade of up to 100x. We’re using PrimeXBT for the training so you should as well create an account here.
3. Platform to buy as low as $10 BTC. You can do that on LUNO or Yellowcard.
4. And most importantly an open mind
So let’s begin
First, we will look at “trading”.Trading simply means buying and selling. And like the traditional market, our mummy’s go to, what dictates the price is the forces of demand and supply.
The higher the number of sellers and the quantity of product sold, the lower the price. And the higher the number of buyers and the quantity of product bought, the higher the price becomes.
For instance, a city like Kano with numerous cattle and cattle sellers will have the price of a cow very cheap when compared to a city like Lagos with few cattle rearers and few cattle for sale.
Now that you understand what the demand and supply are, and how it affects the price. The next thing you need to understand is the fact that the market is cyclical.
This means prices always move from being cheap to be expensive, and then from being expensive back to being cheap. To and fro. And that’s what we call market seasons. Bear seasons when prices are crashing, and bull season when prices are rising.
So before we move on to trading the financial market. You must also understand the difference between the Traditional Market and the Financial Market.
The traditional market is the physical market. If you have any goods to sell, you’ll always have to attract or look for buyers. But that is not the case in the financial market.
The financial is more or less a Digital Market, and there are always buyers on exchanges depending on the instrument you’re trading. We call this constant buyers and sellers “liquidity”, and it is the big banks and financial institutions that provide the liquidity.
Although, it’s good that you can automatically sell any instrument that you buy. Its disadvantage is that the same banks providing the liquidity are the market makers, and they tend to determine the direction of the market.
Hence, you’re trading against the banks, smartest of traders in the world. And if you don’t have a good strategy or risk management technique, you will most likely lose to them.
What Else Do You Need To Know About The Financial Market
First, you need to know the major participants involved, and what is best for them. The two participants are:
1. Individuals are people like me and you who want to profit from the price fluctuations in the financial market but with little capital and technical resources.
2. Professionals on the other side are big institutions who are leveraging on the financial market but with huge capital and technical resources like computers, robots, analyst etc. They can fall under any of this category: Hedge Fund, Mutual Fund, Banks, Institutional Investors etc.
I won’t talk much about the professionals in the market because at the moment I’m playing the game as an individual, and I can only tell you more about how individuals play the game.
As an individual, you need to do more of long-term investing than placing short term trades. And if at all you must place short term trades, you should make sure that you’re not using more than 30% of your available capital for it.
So what does this mean?
It simply means that if you have a total capital of $1000. You should make sure that $700 goes for long-term investment and holdings in the financial market while the remaining $300 goes for short-term trades.
Long term trades here means 2 – 5 years, and Short term trades here means Day Trading or holding positions for a few months.
I’m sure you’re wondering why divide your available capital into 70% and 30% for a long term and short trades respectively. The answer is simple.
In placing short trades you’re prone to lose more capital because you’re trading against institutions that use algometric trading. These institutions use robots to place thousands of short trades within minutes. They simply have a comparative advantage over humans who can only make few trades a day(let’s say a maximum of 100 trades a day).
While individuals care about the outcome of a few trades, the professionals play like the casino house. They’re after the result after a huge number of trades, not just a few trades.
Besides, just like winning a Jack Pot, it’s possible for an individual trader to win big within 2 months and be happy. But what happens after 1 or 2 years. The results are usually devastating.
So to avoid losing all your capital, and even stressing yourself competing against a robot. It’s advisable to use less than 30% of all the available capital you have to make short-term trades in the financial market.
Some experts even advice 20%. But it’s left to you whether you choose 30%, 20% or 10% of your available capital or not.
Once you get the proper amount of your capital to use for trading, the next step is understanding the following technics.
1. Trading System:
There are various trading system available out there; from Trend Following to Mean Dispersion to Wykoff etc. But as a beginner, it’s advisable to start with trend following.
This simply means you’re following the trend of the market. If the market is going up you buy, and if the market is falling you sell. This is far easier to do and much profitable when compared with other systems.
2. Trading strategy:
The strategy here is how you play the game of Trading. It’s just like knowing that you’re going from Lagos to Abuja. You can either go by aeroplane to safe time or you go by bus and save cost. It all depends on you.
Your strategy in trading might be to use support and resistance to determine when to enter and close your trades.
What I mean by Support here is the imaginary price level where we have intense buying pressure, which causes the price to rise.
Resistance on the other side is the price level that we have intense selling pressure, therefore which cause the price to fall.
I will further explain this by showing you the price chart of Oil in the global market. From the chart $20 is the recent support because it has been going higher from there while $28 is its resistance because the price has been falling from there.
3 Risk Management:
The 2 ways I currently manage risk is by doing Position Sizing and using Stop Loss.
Position sizing is the way you allocate risk capital to each trade. Your risk capital is how much you’re risking or willing to lose on a particular trade in other to get a particular return.
To better understand how position sizing helps you limit risk. I will take you back to my secondary school days when I use to play betting with WHOT.
Most times, after I had removed my transport money back home and I still have like N500 left, I do play bet with WHOT.
Naturally, I just don’t put all the N500 on a single bet. And that is where position sizing starts from.
So Instead of risking N500 on a single bet and losing all the capital at once, I risk N100 per bet. This way, I would be able to play 5 consecutive losing bets before I lose all my money.
To elucidate, this means that in my WHOT trading session, my position sizing method is using 20% of my total capital as risk capital on each WHOT Bet.
20% of N500 = N100
So if I play 5 losing trades of N100 each, I can then pack my load and go home.
Let’s assume I use 10% of my N500 per WHOT bet, how many consecutive losing bet will I make before I lose all my money? The answer is 10. N50 on 10 losing bet sums up to N500.
What I’m trying to explain here is that the lower the % of your trading capital you use per trade, the more trades you can place. And if you have a good strategy, playing more gains allows you to compound wins and reduce losses.
Don’t be the FOOL 😂 that uses all is capital on a single trade in the financial market and loses it on it.
Don’t also be the one that uses all his capital 😉 on just two trades and loses it.
You have got to spread your risk and take more chances.
You must have a particular % of your total capital that will be used as the risk capital for each trade.
Proper position sizing used by expert traders suggests that you should not use more than 1% of your trading capital on each trade.
If you comply by risking just 1% of your trading capital as the risk capital for each trades, you will be able to places up to 280 losing trades in a roll before you lose all your trading capital.
And to be honest, although it’s possible, it’s very rear to place 280 trades in a roll and loose all.
In comparison, if I was to use the 20% position sizing technique that I used in playing WHOT in the Financial market, I would easily lose all my trading capital because it’s very possible to place 5 losing trades in the financial market.
You can place 10 trades in the financial market and loose all.
I believe you now understand why it’s good to adopt a 1% position sizing technique for your trades. So the next risk management technique is the use of Stop Loss.
Stop Loss is how you enforce your position sizing technique.
For instance, let’s say you have a $300 trading account, and you’re using a 1% position sizing technique (that is you’re risking $3 per trade). If you bought 1 Bitcoin at $300, you must place a stop loss at $297 so that the trade can automatically close thus limiting your loss to only $3.
But let’s say you didn’t put a Stop Loss at $297 and prices fell below it to $280. That means you have a loss of $20 from your trading capital.
If this looks a little bit complicating. You don’t need to be scared, it’s just simple maths. And with more practice, you will get it.
If you got it to this point, we can then move to margin trading on the PrimeXBT platform, where you can start trading with as little as $10.
But if you’re confused, please ask questions in the comments below. That way, I can further be of help.