Many traders will ask the most relevant and pertinent questions when they first discover forex trading, as either an investment hobby or potential career; “what do I have to do in order to become a trader, how much do I need to trade, how long will it take to potentially become successful?” appear to be some of the four most repeated questions from novices.
In some ways the clarity and innocence displayed during these early days, cuts through the complication and sophistication of our industry and gets right to the point; “how much do I need, what will I make, what do I need to do and how long is it going to take?” is in fact a perfect distillation of the reasons of how and why we should trade. And keeping focused on such a phrase, during our early months and years, could prove to be beneficial, in terms of concentrating our minds.
The internet is awash with advice on the various stages of development we’ll need to experience and the steps we need to take as human beings, before we become what we’d term “successful” traders. It’s therefore difficult to isolate the stages and steps into definitive and recognisable phases, moreover, many experienced traders will have varying opinions on the various phases and steps we encounter during our metamorphosis.
However, let’s attempt to isolate just three key steps, in effect some of the various milestones we have to pass through, in order to keep ourselves on the right pathway.
Stage one; learning how not to lose money.
You can’t begin to take money out of the markets, until you learn how to stop losing money, both issues are directly correlated. If we measure our trading over a period of perhaps 1,000 trades, using a day trading strategy of taking three trades a day, and we break even over a period of approximately one year, then the good news is that we’re in the top 10% of performing retail traders. Not only do close on 50% of traders not even get past six months of trading, before giving it up as a potential career, the percentage of profitable traders who stay the course is even less, some surveys putting it as low as 5-10%.
Putting the brakes on losing money, once we apply some basic rules to our trading. For example; stop risking 2% per trade, only risk 0.5% per trade and never lose more than 1% a day. Use stops. Only go long when markets are bullish, short when markets are bearish. Trade less; only take one or two day trades per day whilst a novice, only trade one major currency pair, with the lowest spreads and less chance of poor fills, such as the EUR/USD.
Stage two; making small amount of money.
The next step on our journey is to begin making small amounts of money and seeing our account grow, by using: low leverage, stops, tight money management and risking a small percentage of our account per trade. The crucial aspect is consistency; can we develop a trading plan/method/strategy that consistently delivers positive results? We need to ideally develop a system that has over a 50:50 percent win rate, perhaps 60:40, which when it wins, banks more profit proportionally than the losses incurred when it loses.
Stage three; scaling up.
If we can track the performance and tighten up certain aspects of our plan/strategy, then we may be in a position to increase our: account size, leverage and our risk. Alternatively we may simply increase our account size, but leave the leverage and level of risk unchanged.
It must be noted that research suggests the majority of traders remain permanently marooned at stage one. They’ll either lose their initial account and give up any idea or trading, become involved in a perpetual loop of losing, whilst continuing to risk more of their savings or disposable income, or begin to regard forex trading as a betting hobby. There is no reason to remain locked at stage one, there are enough remedies available, both practical and in terms of our mentality, which can dramatically effect our performance. But until we can master stage one, our likelihood of progress is unlikely.
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