Trading is a journey that has a clear beginning and no end. When you decide to begin trading, the journey begins, but it never ends until the day you stop. Each year you will learn more and become more proficient and effective in your trader skill-set. The manner in which your trading journey ends is largely up to you. Unfortunately, the end of the journey is not so sweet for most traders-we all know the industry legend that 90%+ of traders fail. The truth is, however, most of the 90%+ that fail as traders, fail due to preventable reasons. In this article we are going to break down why most traders fail and then discuss specific steps every new trader should take to significantly increase the probability of trading success.
First of all, trading is a profession, and it should be treated as such. Trading financial markets is similar to any other professional field in many ways. Engineering, Architecture, Law, and Medicine are all different professional fields, but they share a common path. First, a new initiate spends several years getting educated. Then as a person has proved competence through various tests over a several year period, then he or she enters into a more formal hands-on training called an internship. Then, after another year or several years of internship, a person is finally granted a professional degree and formally admitted into the workforce. This path of education, training, and employment is similar to what should happen in the trading journey, but most new traders are unwilling to go down this path.
Most traders are disillusioned by the internet marketing world. They believe that trading is going to be easy. They believe it will be realistic to earn 100%+ returns every year beginning immediately. $10,000 should be turned into over $1,000,000 in less than a few years. These thoughts are very common among new traders, and unfortunately they set them up for failure. Unrealistic expectations are a common cause of failure for new traders. As stated, trading is a profession and should be treated as such.
The first stage of the trading journey is education. The reality is that this stage will never fully end-you will never stop learning as a trader. Even after you have been trading for 20+ years, you will still be learning every day. The market environment is always shifting and changing-it is never constant. This ever-changing environment will force you to keep learning. However, the initial stage of education involves laying your foundational understanding of the asset you are trading, how to execute and manage trades on your platform, how to analyze the economic environment to understand how the price of your assets will be affected, and how to write a trade plan, etc. This length of this period of education will vary from trader to trader and depends heavily on one’s formal educational background, learning ability, etc.
During this phase, a new trader should be practicing on a simulated, or demo account. You can get a demo account here. One key to knowing if you are ready to move beyond a demo account is if you can be put together two consecutive winning months with a smooth equity curve. The smooth equity curve is essential though. This means you cannot be up 15%, down 5%, down 20%, and then up a few percent to end the month. There needs to be a steady constant growth to the account with minimal, controlled drawdown. If you can do this for two months, then you are probably read to enter the second phase-the internship.
In the trading journey, the internship is very similar to the internship that other professionals including doctors and architects experience. In those other professional fields, an intern is not doing simulated work. Instead, they are doing real work under the close supervision of field professionals. Trading should be not different. Once two consecutive months of steady gains have been earned in a simulated account, a trader should open a very small account relative to his net worth. The amount placed into this account will vary greatly from trader to trader, but a good rule of thumb is to make it an amount that you could lose and it would not affect your living standard in the least. A good way to think about it may be to compare it to an expensive vacation. For some traders that may be $500, and for some that may be well over $10,000. The number is not important, but it’s value in relation to your overall net worth is essential. Again-be sure that this is not a lot of money to you. The reason is simple. The chances of you losing this money are quite high!
Now, one of the biggest drawbacks of learning how to trade is the fact you will most likely have to teach yourself. In other professional fields your education and internship is conducted under the close supervision of field professionals, but in trading, unless you have connections with full-time, successful traders, you will most likely have to blaze your own trail. The drawback to this unfortunate reality is that it extends the learning curve for most traders. If you could have someone standing over your shoulder, or even consulting with you over the phone, it would help tremendously. Therefore, network as much as you can and try to connect with successful, professional traders.
Once you have put together 6 consecutive months of strong winning months, then you are ready to move to the final stage of the learning curve. Also, if you have a month of two that is breakeven or slightly down, that is okay. That is the reality of trading. If you have 4 positive months, and 2 breakeven or slightly down months over the course of 6 months, that is great!! Do not expect every month to be a positive month because that probably will not happen. Your goal instead should be to execute your strategy without fail. If you do that, money will be a byproduct of your trading success.
The final stage of the trading learning curve is to fully fund an account and begin trading heavy positions. This stage goes on forever. Traders who really develop strong habits of success oftentimes transition to managing money at some point, and then trading becomes more of a formalized business. The funding of your trading account at this point will most likely be a substantial amount of money for you personally, but when you fund the account you must be willing to face the reality that the possibility exists you could lose all of this money. If you follow the first two stages of the trading journey exhaustively, then your chances of losing all this money are extremely low, but it has been done before-many times by many traders. Therefore, be humble. The greatest traders oftentimes have a very healthy, not unhealthy, fear of the markets, as they realize that if they slip up in their discipline and trading habits, the market will show no mercy, and money will be lost very quickly.
If you approach trading with the understanding that it is a journey which will take time, your probability of trading success will increase dramatically. Do not expect to begin trading and make several thousand dollars after a few months. Instead, be realistic. Set realistic goals. You should allow at least 8 months of practice before you fund your trading account with substantial money, and it may take much longer than that, depending on your progress. The good news is that you can become a full-time, successful trader who earns a living from the market. It has been done by traders before you which means you can do it, too!