This is a GUEST POST from Rolf @Tradeciety. I am a huge fan of his work.
What You Know Versus What You Think You Know About Being a Trader
1. What Is Trading?
Your first stage of being a trader is when you have no clue what trading is but you really like the idea of how much money you could make by just clicking your mouse. This is a potentially dangerous starting point, because already you are expecting exciting results, without any knowledge of your potential losses. Fact: Less than 1% of traders make money.
Tip: learn the foundations of trading and don’t trade an account with a big size until you are making consistent gains; better still, start with a demo account as you learn all the moving parts, then when you are ready to fund your account, start small whilst testing your systems in different market conditions.
2. Oh, This Is Easy!
Next, you start to have a few winning trades, without any prior experience and think trading is an easy way to get rich. Starting out winning is the most dangerous scenario for a newbie, because this gives you a false sense of security. Chances are that you have just been lucky and your excitement is leading to pure gambling habits.
Tip: Don’t increase risk and don’t start putting on big positions in your euphoria. The biggest winners in the markets are those who build up their wealth incrementally and reserve the rare big positions for exceptional market set ups. A good starting point is to risk only a maximum of 1% of your account in any single trade and if you find yourself in a losing streak, take a step back and analyze your trading behavior. Do this and you will develop winning habits.
3. Ok, Maybe It’s Not That Easy
Uhon! You suddenly get your wakeup call and realize that trading is not that easy after losing a bunch of money and blowing up your first account! Virtually every trader has done this… Learn from their mistakes! Apart from losing your hard earned money, the effect that a huge drawdown has can knock your confidence for a long time. Go back to demo trading and start to keep a trading journal of your trades, so you can see where you are going wrong and what works best for you.
Tip: Don’t give up. Just keep an eye on your habits. Review your trading journal once a week and continue to learn from your mistakes.
4. Your AHA – Moment
You realize that trading is not about entries and fancy indicators, but watching price and market conditions, waiting for your set up parameters to happen and developing a solid risk and money management approach.
Tip: Stop the system-hopping and find your “one thing” – your one strategy – you want to master. We are all different. Different market conditions and set ups suit different personalities. Know yourself and your system and learn the importance of risk and money management.
5. You Find Your Edge
You turn your trading around and see that you can finally trade profitably, but you don’t trust it yet. Your winning traders exceed your losses, but you feel that you are still perhaps missing something to stack the probabilities in your favour and reduce your risk. Keep writing your trading journal and reviewing what you do and tweaking your edge by analyzing your trading performance.
Tip: Don’t get too excited just yet. Stick to the plan and execute your trades the same way religiously. Plan the trade and trade the plan, day in, day out. Keep learning more about the markets you trade. Markets are living organisms who constantly change, and you have to adapt in order to stay ahead.
6. You Are A Consistent Profitable Trader
You have been profitable for a few months and see that you can trade profitably without sweating every up- and down tick. If your trading account is not big enough that your performance allows you to make a living off of it just yet, don’t try to find a shortcut, but grow your account slowly and steadily and never stop adapting to ever-changing market conditions.
Tip: If your ultimate goal is it to quit your day-job, don’t rush things. Remember the fable of the Hare and the Tortoise. The markets were here before you and they will be here long after you’re gone.
You can read more of Rolf’s work here at Tradeciety.com.