So, you have taken the monumental decision and have decided that you would like to trade! Trading is definitely a rewarding career but trading is also a difficult one as well. Learning how to make money in the market is a journey that will require you to look deep within yourself as well as look at a computer screen at a stock chart. It is my aim is to help you lay down your future foundation to becoming an excellent trader and to provide you with some of the fundamental tools that you will need to succeed so you won't make these bad trading mistakes.
Firstly, a word of warning! There is a lot of information out thereon the internet and other forms of media - some good trading tips and some not so good. All you really need to do is type "trading" into a Google search engine and it will come up with millions of systems, ideas and articles that offer guaranteed success! Unfortunately, trading is not that simple as otherwise we would all be master traders! Trading involves as much your personality as it does your analytical skills. As such, a system that may work for one individual may not work for another purely because each individual is different.
In this articles, I want to discuss the very first things you should consider before even placing your first trade. Answering these questions will help you out with your trading profits. These are questions that will help determine your personality and enable you to design a system in the future based on your own objectives and not that of somebody else. I would also suggest that you write the answer to these questions down on a piece of paper to help you focus your mind.
1. Your objectives
The first question you need to answer is "What do you want to achieve with trading?" It is simply not enough to say that you want to trade to make money (although this is obviously the major reason)!
You need to look into the question further and ask yourself the following detailed questions. These are not exhaustive and you may think of some of your own to consider as well.
•· How much money do you want to make a year with your trading?
The obvious answer to this would be to say something like "as much as possible." However, you do need to be realistic and have a definite objective in mind. For example, is it realistic to want to make 500% a year while most other professional fund managers struggle to make 30%? Is it more appropriate to say 10-20% and then build on this when this target has been achieved consistently?
•· How much initial capital do you have to invest to begin with?
It is important to start off with a reasonable trading capital seed. There are numerous expenses associated with trading. Commission charges by brokers are one example. You need to ensure that you have enough capital to get going and then to keep afloat in the future.
In addition, is this money that you can afford to lose if the markets turn bad? Never trade with money that you can not afford to lose.
•· How much time do you have to invest on a daily basis to trading?
Do you work during the day or are you able to look at a trading screen all day? Answering these questions cut down on your trading risks. This may help to answer whether you will be a full or part time trader. Being a part-time trader does not necessarily mean that you will earn less - it just means that your trading strategy will be different to that of a full time trader.
What will you use the money that you gain as a result of trading for?
Will you use your winnings to invest or will you be using it as a second source of income? Trading experts know what they are going to do with their money.
•· How will you fund your set up and recurring costs?
How will you fund your set up costs - e.g. computer, account set up costs, trading software purchase etc and how will you fund the recurring costs of trading e.g. data feeds, further training, internet access etc
2. What will you trade?
After completing your objectives, it is then the time to select the markets that you will trade. As an example, will you trade the companies in the DJIA or will you trade a commodity like gold or oil? There are a plethora of companies and other things that can be traded and the choice should ideally be based on your experience. For example, it is probably not a good idea for a beginner to start trading in the futures market; however trading the companies on the S&P 500 list may expose the novice to less risk and volatility and may therefore be a better option. The choice, ultimately, is yours.
It is now a good time to bust some myths:
•· Trading more does not make you more money - it can actually be more expensive as you will be paying a lot more in commission fees to brokers.
•· Trading all markets at once does not make you more money - it does not allow you to focus your energy into one market that may have a better chance of making you more money.
The best option is to concentrate your energies and master just one market. After mastering the market, you will be in a better position to move on to others.
3. Design a trading plan
Another fundamental and crucial area to work on is your trading plan. This includes setting the right trading entry, trading stops etc. This is, in its simplest form, a set of rules that you have developed to tell you when to enter into a trade, when to get out and how much money to put into a trade according to your risk level. Without a defined set of rules to govern your trading, you risk becoming undisciplined and will eventually let your emotions control your trading - this is a recipe for disaster and you will eventually fail at trading and lose a lot of money. A trading plan should be written down and followed precisely. It should also be reviewed and improved on a regular basis. Back-testing the plan on past data may also help to give you confidence that your plan will succeed in the future.
As a general rule, the best trading plans & tips tend to be the ones that are the simplest to follow. Over complicating your plan will result in confusion and may make the plan impossible to trade. It should also be versatile enough to work in a variety of market conditions such as in a bear, bull or sideways trending market.
4. Following your plan
Once you have designed your plan, follow it to the letter. The easiest thing to do is to let your emotions get the better of you and let the two deadly emotions of fear and greed take over (more bad trading strategies). The market may even reinforce bad behaviour in the short term by giving you an occasional winning trade - however, this behaviour will not be profitable in the long run and you will eventually lose a lot of money if the behaviour continues. This is one of the reasons why novices take a long time to learn to trade. Unlike many other professions, a trader is free to create whatever rules he or she wants when trading - this freedom can be very beneficial but can also be disastrous if left to an undisciplined trader.
5. Risk Management
Managing your risk is essential to your success as a trader. It is best to start with a small amount of money and let your confidence grow from there. Above all, only trade with money that you are comfortable of losing if things go wrong - in other words, do not gamble with the rent money!
Another key to success is knowing when to get out of a trade that is going in the opposite direction to what you would like it to. There is an old saying that states "cut losses short and let profits run." Unfortunately, human nature does the exact opposite. It is the undisciplined trader that will panic and freeze with fear and will allow a small loss to mount up to be a large one. In a similar manner, an undisciplined trader will take whatever profits he or she has no matter how small in fear that it will be lost in the future. Trading will require you to overcome these instincts.
In the next chapter, we discuss the area of money management as a central part to any trading plan.
Next Trading Article: Mistakes That Stand Between You And Your Success in the Market
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