Most individuals think that trading is easy, the solution to all their money woes and a profession where money is practically thrown at them, and they will be in profit from day one. They could not be more wrong!
Trading is a profession that requires hard work, an enormous amount of practice to hone those trading skills and dedication to even stand a chance of succeeding as a trader.
Many new traders try without training
Many try trading without any training, except possibly watching a few YouTube videos. Viewing different traders online often causes confusion as each trader creates and develops his own style of trading based on his/her character, experience, abilities, and capital. The latter is a major hurdle for many new traders; not having enough capital behind you when you start trading can create too much pressure on your trading decisions. Ideally, anyone entering trading will already have a steady income and therefore can take the slow approach towards becoming a trader. This is important as it removes the need to make money daily, as sadly those that need to make money every day from their trading rarely survive.
Having to make money to cover bills means traders rush into trades, grab at profits, set their targets too high – which in turn leads to taking on riskier trades, and disappointment when they do not reach their target. Trading is based on probabilities and traders should only consider entering the high probability trades, its quality over quantity!
I always suggest to would be traders coming through my courses that before considering trading with their capital they calculate the maximum amount they will invest in becoming a trader, as you would any business. Once this amount is set it should not be broken! The reason to do this is that it is quite easy to open a small account and then keep topping it up when you lose. However, this can lead to a massive erosion of hard-earned capital without realising it! With a set amount you can track capital much more tightly and control it.
Create an Excel spreadsheet, put in the sum that is your maximum and deduct from it each time you top up. If it reaches zero, you’re done! This does not mean trading is not for you; it’s just not right for you now! Go back to a simulator account for at least six months. I set my guys a challenge to help them assess if they are ready.
Developing a trading plan
Many are so keen to trade they begin trading without sufficient practise behind them to create a solid trading plan. This consists of two sets of rules built to protect them from losing too much capital in any one trade or on any one day. It also includes the criteria the market must meet before a trade is executed. Creating a solid trading plan helps develop consistency which is essential to a trader. When you start trading you get to understand not just the market but also much more about yourself!
As a professional trader when I am considering taking on a trade, the first thing I do once I have identified my entry price is to establish where my stop loss should be placed as this establishes the potential loss, should the market go against me! Once I have assessed that, I can look at the potential profit I can make from the trade – creating the risk-reward in the trade.
Another thing to consider is something I call the three Vs – Volume versus Volatility. The higher the volatility the less volume (size) to commit to the trade as this allows for the market to go further against you without increasing the potential loss, and most trades will go against you before moving back in your favour…if they are going to!
Many traders lack discipline due to poor risk-reward ratios. This makes trading more challenging as they need to win more trades. I always recommend a minimum 2:1 risk-reward as even if you are right only 50% of the time you will still be ahead. However, this should not be so rigid that if you feel the market will not quite get to your price you hold out, as then the trade could lead to a loss. It is okay to accept less on some trades as when you have a strong feeling it is possible to aim for higher profits on others.
I always aim to maximise my profit in every trade and create zones rather than a single price. I will identify the price I expect the market to reject and place a series of orders in front of that price. My stop loss will be either based on the average price or individual stop orders against each entry price, the total loss will be the same regardless. When the market is moving in my favour and reaches my profit zone, I begin to exit the position a little at a time to gain a decent average, just in case the market reverses. Zones again offer flexibility!
Understand the products you are trading
Another issue is this: some traders do not understand the assets they are trading. They are oblivious to the fundamentals that influence their asset, thereby impacting their potential to profit from trades or cut losses early when the fundamentals change. Correlations between various products or asset classes can also be extremely useful for this.
If a trader is trading a contract such as the S&P 500 it is an advantage to know the companies that impact the index the most. I always suggest learning the top 10 companies or make a list of the top 10%. Imagine holding a long position and positive news breaks regarding one of those companies. It provides you the insight to add to your long position or remove your sell order as there is probably a lot more profit to be taken from that trade!
Alternatively, if the news were negative it would give you the opportunity to exit your position early or even reverse it!