Answers To Common Trading Questions

A lot of new traders have the same questions. This post will attempt to answer many of those questions in a very concise way and link to other resources that answer the question in more detail.

How much money do you need to start trading?
What is the ‘pattern day trader’ rule?
What website / broker should I use?
What is the best course for beginning traders?
What is the difference between day trading and swing trading?
How can I practice day trading?
How do you trade bitcoin or cryptocurrencies?
How do I get started trading?
What trading strategy should I use?
Is day trading gambling?
What is a margin account and how does it work?

Q. How much money do you need to start trading?

A. Generally speaking, you want to have enough capital so that you can risk 1% of your capital per trade and still be profitable after accounting for slippage and commissions. So the amount of money you need will vary considerably based on what market you are trading.

If you find a forex broker that allows you to trade micro-lots (like Oanda), you could start with $100 and trade $1 worth of a currency pair. Forex brokers usually don’t charge a commission so you could actually build your account with $1 trades.

If you want to day trade US stocks there is a ‘pattern day trader’ rule that restricts how many trades you can do in a day unless you have at least $25,000 in you account. So if you want to trade stocks it is generally easier to start with swing-trading (holding for multiple days) which also tends to be easier than day-trading because you have more time to think and is easier to be profitable because the spreads are smaller relative to your risk per trade.

Options and futures give you a lot of leverage and allow you to get around the ‘pattern day trader’ rule, but they are more complicated instruments and may not be the best place for new traders to start with.

Q. What is the ‘pattern day trader’ rule?

A. If you make four or more daytrades in 5 day period and those trades are more than 6% of your activity in that period then your account will be considered a ‘pattern day trader’ account and will be restricted from trading. This rule doesn’t apply if you have at least $25,000 of equity in your account.

Q. What website / broker should I use?

A. That depends on what market you want to trade. If you want to trade US stocks or options then TD Ameritrade is a good choice because you can use their ThinkOrSwim platform for free (including free real-time data). But they don’t have the lowest commissions. Interactive Brokers generally has the lowest commissions in the US (often $1 for stock trades) and their platform allows you to trade anything, but they have a $10/month minimum fee that is waived when you generate $10 of commissions.

If you live in the US, the government only allows you to use brokers that conform to stringent regulations that include Oanda, Forex.com, and several others. If you live outside the US there are many more brokers to choose from and a lot of them are somewhat shady.

Q. What is the best course for beginning traders?

A. We are obviously going to recommend our free Total Newbie Trading Course. More generally, there are a lot of ‘educators’ out there offering trading courses for thousands of dollars and many of them are junk. When you are just starting out there are enough free resources or cheaper courses you can get that are as good or better than the several thousand dollar courses. Once you get more experienced it will be easier to know which educators seem legitimate and which are scam artists.

Q. What is the difference between day trading and swing trading?

A. Day trading means you are buying or selling some financial instrument with the expectation that the price will move in your favor and you will exit the position in less than 24 hours. Because you are trying to profit from very small movements in prices (like $.10 in a stock) you usually need some kind of leverage so you can make a decent return off of that very small movement. Forex, futures, and options are leveraged instruments by nature. You can also get margin accounts at most brokers as a way to buy large amounts of stock to use in day trading.

Swing trading is when you buy something and expect to hold it longer than a day, often a couple weeks or months. It is generally easier than day trading because you don’t have to react as quickly, you don’t need as much leverage, and the trading costs (slippage, spreads, commissions) are lower relative to the amount of risk you’re taking.

Position trading is another term that is longer duration than swing trading. Institutions often take positions in a stock they like fundamentally and want to hold for months or years. But they will sell some shares when they think the stock is expensive and buy them back when the price goes down.

Q. How can I practice day trading?

A. Interactive Brokers and TD Ameritrade have platforms with paper trading accounts so you can practice trading without risking money. Oanda is a forex broker with an easy to use paper trading feature. Ninjatrader is a popular charting package that has a simulator, and there are a number of other brokers and software packages that have some type of simulator.

Q. How do you trade bitcoin or cryptocurrencies?

In late 2017 there were multiple futures contracts for bitcoin that began trading on the CME and CBOT (the major US futures exchanges). Many brokers that allow you to trade futures can now be used to trade bitcoin. But many retail traders use GDAX, which is a US regulated exchange for cryptocurrencies like bitcoin, litecoin, and ethereum.

Q. How do I get started trading?

A. To be a successful trader you basically need 3 things: a profitable strategy, discipline to follow your strategy, and a risk management plan. We cover this if our free Total Newbie Trading Course.

Once you have a trading plan, it is usually smart to start paper trading so you don’t risk any real money. If you open an account with TD Ameritrade you can use their free platform to paper trade, but there are several other brokers and software packages that will allow you to paper trade also.

Once you are consistently profitable paper trading you should deposit some real money with your broker and start trading for real which can be much more difficult than paper trading because your emotions are a lot stronger when you are risking real money.

Q. What trading strategy should I use?

A. There are a lot of websites touting all kinds of strategies based on various indicators like MACD, RSI, Bollinger Bands, etc. Most new traders spend a lot of time experimenting with various combinations of signals based on indicators and eventually get frustrated and decide trading is just gambling or the markets are ‘rigged’.

The problem with most indicators is that they work in some market conditions but not others. For example, selling when RSI is overbought and buying with it is oversold will probably work when you’re in a trading range. But if the market starts breaking out into a strong trend, RSI is going to be overbought for an extended period of time and anybody who is selling that market is going to get run over.

It may be possible that certain combinations of indicators could work over time, especially if they are combined with a discretionary element that looks at significant price levels and the market condition. But if you want a consistent edge then we recommend studying strategies that focus on price, volume, and the market context and minimize the use of indicators.

Q. Is day trading gambling?

A. It depends on whether you have a statistical edge when you take a trade. Many people try daytrading who don’t really
have a plan, and they end up trading mostly based on their emotions. It can be exciting to do that, but that is gambling. On the other hand, if you have done a lot of research and you’re confident there is a 60% change the price of a stock will go up 1% before going down 1%, and you are able to consistently get out at your target profit or stop price, then that sounds like a business plan.

Q. What is a margin account and how does it work?

A. Many brokers will let you turn your regular account into a margin account if you just sign some additional forms. A margin account just means that the broker will lend you money to buy financial instruments, and the amount you can borrow is based on the assets in your account. Typically, if you have $5000 in your account your broker will let you buy an additional $5000 on margin. If you have a larger account the amount you can borrow can be higher.

It should be noted that futures, forex, and options were created to be leveraged instruments. A forex account will often let you borrow 50 times the amount in your account to buy currencies which actually isn’t as risky as it sounds because currency prices typically fluctuate much less than stock prices. Many futures brokers only require you to put down ~$500 to be able to trade 1 futures contract which can the equivalent of over $100,000 of stock.

Q. What are the best trading books for beginners?
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Q. Are the markets rigged against retail traders?

Q. Do 90% of traders lose money?

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