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From choosing your broker, to understanding the costs associated with your trading, to knowing your product. I will cover all of these aspects in this post.
A lot of newbie traders, just want to go straight ahead and dive into trading live accounts without the necessary preparation. The same can be said for some more experienced traders who ignore the preparation and in the end, this could be one of the reason for them not being as successful.
I am starting this series of trader diaries, by going into more detail about the preparations I did before I started trading full-time for myself back in March this year.
Understand yourself, your goals and how you want to achieve them
Trading isn't much different than any other thing you do in life in this aspect. You need to understand yourself in terms of your personality and traits. Based on these, a certain trading style could be ideal for you, whereas others won't suit you. This is where being taught a strategy or style by someone else may prove disadvantageous for you. Some traders like daytrading and fast moving markets, others like holding positions for longer and slower markets. Generally speaking if something makes you uncomfortable, it's probably for a reason. Once you have found a way that works for you, then setting your goals (preferably not in monetary terms) comes next, followed by making the choices which could help you achieve them and even enhance your strategy.
In my particular case, I decided on daytrading futures and doing more long term trades on CFDs. My particular style works better when I hold trades for a bit longer - from a few days, to a few weeks. That being said, I also wanted to give daytrading futures another go, as this was the way I started my trading career back in 2015.
In terms of goals which I set myself - I wanted to improve by starting to backtest my strategies, and also improving my coding skills, so I can automate some of them. I also wanted to overcome some psychological hurdles - holding onto my gains and not have regrets about missing a trade, or overreactions to losses.
From knowing my past mistakes and experience, I knew that if I overcame these hurdles, and improved these particular skills, I should be able to trade successfully for myself.
The product
You need to understand from the beginning which product you are going to trade. To clarify, by product I mean - are you going to trade derivatives, cash etc. Once you make this decision, you can move on to specifics as to which market specifically you want to trade. In my case I had decided that I was going to trade futures and CFDs which are both derivative products which utilise margin and leverage. This meant that I would be able to trade bigger positions with a smaller account size. These are also products which are typically used, either for hedging, or speculation. Depending on your time horizons, your risk appetite and your goals, you may find that other products are more suitable for you.
The Broker
Knowing that I was going to focus on futures and CFDs, now I had the objective of finding a reliable broker which was going to help me gain access to these markets.
With futures I wanted a broker which offers direct market access to the exchange, rather than a CFD on a futures contract. Thus for my futures accounts I picked two options - Saxo and Interactive Brokers and I ended up opening accounts with both of them.
For CFDs, I picked brokers which I know from my work experience and connections in the industry. I hold accounts with all the brokers listed on this page and you can see some of their strengths listed there: https://www.marketinsides.com/trusted-brokers
The Costs
Depending on what type of trading you are looking to do, you ought to explore the costs associated with the transactions you are going to do. This is something that depends on the style of trading, and it could prove essential that you align the style with the product you are going to trade.
If you are a more active trader, commissions associated with trades and spread are the ones to be concerned with. Associated with almost every transaction, these could eat out your profits, if you aren't too careful.
Therefore for the active CFD trader, a broker which offers the lowest spreads and commissions could be the best choice.
If you are a trader who commits to more long-term trades, then the commissions and spread might not be the biggest concern. In that case you might look for a broker which offers more markets to trade, or offers something that helps you as a trader. In other words you have more choice. From then on for CFD traders with longer horizons comes the problem with overnight charges. Some markets may prove untradeable due to the high charges for holding your position overnight. Knowing the markets which you trade and the overnight charges per lot is something which, ideally you need to be aware of before putting your trade on. For the general more liquid markets, they tend to be reasonable, however if you decide to look at a more exotic market, then the charges could eat your profits very easily.
For the active futures trader, the commissions are of importance, as the spread is made by the market participants. The benefit for futures traders, is that if they decide, they can make a market and not pay the spread by using passive orders. Generally. with futures brokers, the more volume you do, the more likely it is for them to lower your commissions per trade. Apart from the commission, you also have an exchange fee which you pay for every trade. Ideally you want the commissions as low as possible, without overtrading or changing your style. Some other monthly costs associated with futures trading are - data costs and platform costs. Depending on the futures markets you want to trade, you would have to pick certain live data packages which provide you with live prices and order book depth data. If you don't pay for one of these packages, you usually get 15min delay price data from the broker. Here is the important bit - different exchanges have different packages, so if you decide that you want to trade symbols listed on different futures exchanges, your data costs per month will also become larger. Therefore picking the markets you want to trade and the exchanges you want to get data from, is another subject to think about in advance.
For the more long-term futures trader, the cost of rolling over your future contracts is something to consider.
If you are an investor or a day trader of stocks and ETFs, then there are providers who can offer these commission free.
The Market
You have chosen your product, you have picked the broker, you understand your costs. Now it's time to move towards picking the actual market.
Whether you are going to trade indices, FX, crypto, commodities or stocks - one needs to understand the amount he/she is risking per trade. In my case for futures trading, I have created a spreadsheet which shows the tick value per contract for each market. For the readers who don't know what a tick is - it is the smallest increment by which a market moves. This way I can make quick calculations and understand how much I am risking, and what is my potential reward from the trade.
When it comes to CFDs the process with ticks, pips and points is trickier, as it depends on the currency of your trading account, the currency which the market you are trading is priced in, and the contract size per lot for the particular symbol (the contract size for CFD brokers could be specific for the broker which you chose, therefore it is preferable that you familiarise with it before putting trades on).
A trick that I use sometimes when I am unsure is that I have a demo account set up with exactly the same conditions in terms of leverage as my live account, and I would put the trade on the demo first to make sure that I don't make a mistake when I go and execute the same trade on my live account.
Margin
Understanding margin when you trade leveraged products is important. For futures trading you need to understand that the margin you need to open a trade, changes when a trade is held overnight. This means that generally trading intraday on futures requires a smaller amount of capital than if you are looking to hold trades for longer. Therefore familiarising yourself with the margin requirements per contract is essential before moving in to actual trading. In my case with futures trading, I decided to focus on day trading because of the lower margin requirements. Going forward, provided that my account grows, I am planning on starting to hold trades overnight as well.
For CFD trading, there is a formula to calculate your margin and it is based on the price at which you buy/sell, the leverage which you use and the trade size used. Familiarising yourself with the formula, or again using the demo account to try trades before then opening them on your live account, could help you with the calculations. There are also some providers which actually show you the required margin before opening the trade. With CFD trading the margin requirement normally stays the same, as when you opened the trade, unless the broker notifies you of an increase in margin requirements. This is the main reason why I use CFDs for trades which I intend to hold longer than a day.
In my case I focus on trading indices and commodities, as these are the markets which I find the most comfortable to trade. They are also the markets on which I make the most money. I usually stick with the US indices and also WTI oil, however sometimes I might take opportunities in other markets as well. The point which I am trying to make here is that, I trade highly liquid markets as this gives me more security - I can exit trades quickly if needed. I can also enter trades quickly when needed. All of this comes without having to pay a lot in spread normally. The holding costs are also normal for these types of markets.
Exotic markets, usually have higher spreads, lower liquidity and increased overnight holding costs. Therefore before you engage in trading such markets, you need to make sure you are familiarised with all of this. Remember that when a market has a high spread, there is a reason behind it - traders can't agree on a value for the market and are giving a confidence interval around it.
This concludes this post. I covered some of the main thoughts which I have when I pick a financial product, a broker, and a market to trade. I also shared my choices for each of these and the reasons behind them. Let me know if you want anything covered in more detail. The following posts will focus on particular trades and days since March 2020.