Here are five steps that will help you become a better trader by taking you through the most important steps in your learning curve if you are early in your journey.

  1. As a new trader, you must have realistic expectations about your risk tolerance and return goals. What type of return are you trying to make on your money in percentage terms? Is it realistic compared to other real traders publicly available information? What drawdown in your capital could you accept and not quit? Starting at a place with a target will help in structuring all your other trading. You need both return goals and risk acceptance before you start trying to structure any trading.
  2. Before you put any money at risk you need to choose a trading method, a time frame to trade on, and develop a trading plan with rules. Casinos have rules, probabilities, table limits, and an edge while gamblers just love to play and hope they make some money. If you enter trading like a gambler you will be donating your capital to the other participants. You must choose a strategy to trade that has an edge that will put the odds of success on your side. 
  3. You must quantify your trading actions. Your entries and exits must be based on a market model of success. You are looking for a way to structure your trades to create good risk/return ratios so if you are wrong you will lose a little but if you are right you will make a lot more. Backtesting and studying historical chart patterns will show you what worked in the past and give you better odds of the same price action working for you in the future. You have to find repeatable winning strategies for your own time frame. You must trade with signals and not opinions and predictions if you want to be a long term success. 
  4. Position sizing and risk exposure has to be based on the probability of eliminating the risk of ruin after a sequence of losing trades. The risk rule of trading is don’t blow up your account. Trade a size that is meaningful if you win but is not mentally and financially devastating if you lose. You have to be able to survive losing streaks and trades going against you. The primary tools for risk management are position sizing and your stop loss based on a markets volatility. 
  5. Your trading strategy has to fit your own belief system and personality. You have to find a winning system you can stick with that you can trade on the time frame that fits your lifestyle. Your stress levels should stay manageable for each trade and not cause you to lose control during losing streaks or winning streaks.     

 To become a better trader you need a quantified system with an edge that fits your risk tolerance and return goals and that you can trade with discipline and perseverance using the right position sizing.  


By Steve Burns

After a lifelong fascination with financial markets, Steve began investing in 1993 and trading his accounts in 1995. It was love at first trade. After more than 30 successful years in the markets, Steve now dedicates his time to helping traders improve their psychology and profitability. New Trader U offers an extensive blog resource with more than 4,000 original articles, online courses, and best-selling books covering various topics.