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BOOK YOUR FREE STRATEGY SESSION NOW >>One of the most frequently asked questions among those approaching the world of systematic trading is: how can I start trading and minimize economic risk? As we explain in this video, contrary to popular belief, trading on a simulated platform isn’t the best solution.
The crucial step is choosing the right market. Indeed, there are markets whose characteristics make them more suitable for systematic trading with little capital and others that you should avoid, at least in the early stages of your trading activity.
This video will give you some valuable tips for choosing the best market. By watching it, you’ll discover:
-Why “real” trading on the right market is better than simulated trading
-Which markets are the best to start trading systematically with little capital while minimizing economic risk
-Why Forex is NOT a good market to begin with
Enjoy! 😎
Introduction
Hey everyone, welcome back. Today I want to talk to you about systematic trading, precisely where and how to start.
This may sound like a trivial question, but I can assure you that newbies especially have some doubts before they start trading with this kind of approach.
So, in this video, we’re going to try and shed some light on this.
Okay, guys, one of the coaches at Unger Academy here and let's get started with our video, shall we? So… well, I remember my first steps in systematic trading.
And I remember that I had a lot of doubts. In particular, I remember that I wanted to take a day off from work when I activated my trading systems for the very first time.
So, I think that this video might be helpful to many of you. So let's jump in and see some questions that many novice traders ask.
Platform: simulated or real?
Often the first question people ask is about the platform. It’s not about which platform to use but whether you should trade through a simulated or a real platform. Obviously, this is for starters.
So let's examine the advantages and disadvantages of simulated and real platforms.
If we start from a simulated platform, of course, we have the possibility of trading with fake money.
So basically, we have no risk of loss, which means that we can certainly approach this first step with greater serenity.
On the other hand, however, there is some inaccuracy in the execution of orders.
In fact, simulated platforms can’t know whether an order that you send to the market would have actually been executed by the market or not.
So, what really this means is that these simulations are obviously different from actual market behavior.
Moreover, as far as slippage is concerned, the values we get are totally unrealistic.
The fact is that often these platforms are flawed in the way they work, and generally, they aren’t updated as frequently as real platforms.
So, there can be some technical problems you wouldn’t encounter in real life.
Most importantly, the simulated trading experience is very different from the live experience, especially from an emotional perspective.
By not risking capital, the whole psychological aspect is missing from your trading activity. So fear, greed, uncertainty… you don't feel them at all as you would in real trading so this is certainly a very different experience.
And that’s why I think that choosing a real platform is the optimal choice to starting systematic trading, because in this way you'll get as realistic a picture as possible.
So, there’s only one problem, how to minimize the economic risk? Because at the time we start, the ideal thing to do would be to be able to start trading live without risking much.
So the ideal would be to be able to approach systematic trading in the most realistic way but risking only a very small part of our capital.
How can this be achieved? Well, that's quite simple. Just choose the right markets.
Markets to start with
So let's go and have a look at the most important features that a market should have to be considered as particularly attractive to start systematic trading.
First things first, they have to have good liquidity. This is a, let's say, more or less a general requirement.
So, it isn’t advisable to start trading in an illiquid market. We would add one difficulty after another.
Another extremely important feature is having low entry barriers, in the sense that they should be tradable also with low capital.
But how can this be achieved? Well, there are two main ways: the first is financial leverage, and the second is high granularity of the market itself.
As you probably know, financial leverage (which please, always keep in mind that is a double-edged sword) lets you trade instruments with less capital than required to invest the contracted amount.
High granularity, on the other hand, helps us because it lets use trade instruments that actually have a low cost, such as a stock.
A stock typically costs between $5 and $500, so we’re talking about capital that is affordable for everyone.
What are these markets? Let's have a look at them together. We’ve identified a few, the most important ones.
As I said, there are stocks. Then we have CFDs, namely contracts for difference, which we’ll learn more about later. Basically, you can trade these derivatives directly through your broker. However, they are atypical derivative contracts and each contract can be different from the others.
Micro futures, these are the new futures that have just come up in the U.S. markets (we're talking about a couple of years ago), and that allow you to replicate the operation of a more larger contract, say, the Mini S&P, but with 1/10th of the notional capital.
So, these futures were actually able to lower the barriers to entry, allowing many traders to start trading in futures also with a low capital.
Then we have Forex, which has very high liquidity and high granularity. We’ll see then what the disadvantages of Forex are as well.
The cryptocurrency market, which is very similar to Forex in one way. It’s the new twin of Forex, so to speak, because we’ve moved from traditional currencies to cryptocurrencies and electronic currencies.
Analysis of the individual financial instruments
So let’s go and have a closer look at the features of these different markets, particularly in terms of liquidity and financial leverage.
We're going to start with stocks. Here, by looking at this chart we can see that stocks can be considered a liquid instrument.
Of course, that’s broadly speaking. I mean, if we decided to trade in small caps, we'd obviously have a liquidity that might be slightly lower.
So, it's certainly better to stay within the largest indexes, like the Nasdaq 100 or the S&P 500.
Undoubtedly, these underlying assets are very liquid but on the other hand, they typically offer pretty low financial leverage.
For, let's say, overnight trades, you typically have a 2X leverage, okay? Some brokers may offer higher leverage intraday, maybe up to 4X.
So these are usually low-leverage instruments, but, as I said, they have a low cost, which means that you can also trade them with low capital.
Then there are CFDs, Contracts for Difference, which have gotten a bad reputation over the years.
This isn’t related to the actual instrument itself but rather to how many brokers have used these instruments over the years.
As I mentioned earlier, these are atypical instruments so they can vary from broker to broker.
They usually have good financial leverage, so you can move much more capital. Remember, however, that this is a double-edged sword.
But on the liquidity scale, I rate them at a much lower value than stocks. Again, this is broadly speaking, so it's not universal.
There are brokers like Interactive Brokers, for example, that offer good liquidity for these instruments.
The downside, however, is that some brokers who are sneaky during periods of high volatility tend to widen their spreads. So be extra careful when you want to trade Contracts For Difference, and pay attention to the broker that you use.
Moving on to the following instrument, we have micro futures, which we can place between these two asset classes.
These instruments have good liquidity. I mean, some micro futures are even highly liquid, like the Micro on the Mini S&P 500.
Others, on the other hand, are a little bit less liquid, like the one on Gold. So, if we average the liquidity of these instruments, we can say that they still have good liquidity and provide good leverage.
As a downside, we can certainly mention the commission aspect. In fact, the impact of the commissions when trading micro futures is higher than the impact of commissions when trading the bigger contracts.
Finally, we have Forex. Based on this chart, Forex seems to be the ideal market to start with.
Why? Well, because it has very high liquidity. It’s one of the most liquid markets in the world. However, I’d like to remind you that it isn’t a market with official quotes, so the broker you use plays a major role in this case.
This means that choosing a good broker is absolutely essential because, as with CFDs, there may be less reliable smaller brokers who don’t present you with truthful prices or who apply excessive spreads.
At the same time, in addition to having an excellent liquidity, Forex also offers high financial leverage, so trading with little capital is possible.
And it also has very high granularity, so it would be the ideal market from that perspective as well.
I say "would be" because, in my personal trading experience, developing profitable trading systems for Forex isn’t that easy. Maybe that’s just a limit of mine? Probably.
Final Thoughts
However, I recommend not starting with Forex but starting with the cryptocurrency market.
Because it has a lot, actually many similarities with Forex, it also has very high liquidity. Maybe slightly lower than Forex but still pretty high. Also, consider that the leading cryptocurrency exchanges, like Binance, are very liquid and offer very high financial leverage at the same time.
However, unlike Forex, the cryptocurrency market offers some really exciting opportunities, mainly in terms of the ease of developing trading systems.
If on Forex, as I said from my experience, it’s relatively difficult to develop profitable trading systems, the same cannot be said for the cryptocurrency market.
Indeed, the opposite is usually true, namely, trading strategies that we wouldn’t find working in any other market often show a more attractive performance in the cryptocurrency market.
So, my advice is definitely to go and get deeper into this market. And if I had to choose two markets to advise you to start systematic trading, I’d certainly choose the cryptocurrency market or the micro futures.
These two markets, in my opinion, are optimal for starting systematic trading with very low capital investment.
And if you happen to need help with this entrepreneurial activity, because trading is an entrepreneurial activity, I’ll leave a link in the description of this video.
I'm sure you’re going to find it very useful! You'll find a free presentation by Andrea Unger, in which he introduces you to his trading method, which let him win the World Cup Trading Championships in real-money trading not once, not twice, not even three, but four times.
You can also get our best-selling book, "The Unger Method," by covering only the shipping costs.
Or if you want, you can also book a free strategy consultation with one of our tutors.
Guys, that's all for today!
We thank you so much for watching!
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And that's it, I will see you soon. Bye-bye!
We'll help you map out a plan to fix the problems in your trading and get you to the next level. Answer a few questions on our application and then choose a time that works for you.
BOOK YOUR FREE STRATEGY SESSION NOW >>Andrea Unger here and I help retail traders to improve their trading, scientifically. I went from being a cog in the machine in a multinational company to the only 4-Time World Trading Champion in a little more than 10 years.
I've been a professional trader since 2001 and in 2008 I became World Champion using just 4 automated trading systems.
In 2015 I founded Unger Academy, where I teach my method of developing effecting trading strategies: a scientific, replicable and universal method, based on numbers and statistics, not hunches, which led me and my students to become Champions again and again.
Now I'm here to help you learn how to develop your own strategies, autonomously. This channel will help you improve your trading, know the markets better, and apply the scientific method to financial markets.
Becoming a trader is harder than you think, but if you have passion, will, and sufficient capital, you'll learn how to code and develop effective strategies, manage risk, and diversify a portfolio of trading systems to greatly improve your chances of becoming successful.
