guest contributor Jennifer Gorton from Forex Traders
Many individuals are lured into the world of trading
due to apparent possibility of easy money. However, every new trader quickly
comes to the startling revelation that there is no such thing as easy money
in financial markets. Profiting consistently as a trader is difficult.
Industry legend says that 90%-95% of day-traders lose most or of all of
their capital. Investors who hold trades for a longer period of time tend to
perform better, but the majority still loses money over the long term. It’s
not easy! But there are certain truths that, when followed, tend to increase
the probability of trading success drastically. Let’s examine a few.
Seek to Build A Skill Set, Not To Make Money
The lure of easy and quick money that often draws new
traders must be discarded from one’s
psychological approach to the market. Instead of focusing on making
money, if a trader or investor shifts focus to developing the skill set
necessary for success in the financial markets, the money will take care of
It takes hard work, discipline, and passion to develop the proper
skill that is required of a successful trader. Have a long-term goal in
mind. Be committed to developing your knowledge of the market you want to
trade, and the profits will take care of themselves over time.
Trading Is A Profession, Treat It As Such
Trading is a profession similar to that of a physician,
engineer, or architect. You cannot go to a weekend seminar and become a
successful doctor, and similarly one cannot attend a weekend investing
seminar and expect to be a consistently profitable trader from day one.
Trading must be treated as a profession. A professional in any field has an
initial period of education where they are first immersed in a wealth of new
information that prepares them for success as a content-area expert.
after the initial period of education, they begin to practice. And finally,
after a period of practice, they begin to work as a professional in their
given field of expertise. Treat trading as a business and a profession.
Analyze every trade you take. What did you do right? What did you do wrong?
Similar to how a business continually assesses its operation and business
strategy, you want to continually assess and review your trade ideas and
results in order to fully optimize your trading strategy for maximum
Mental Capital Is Even More Important Than
Much focus in trading books and
educational materials is on money management and how to protect one’s
capital. That is, of course, one of the most important aspects of trading
and investing, and it demands attention. However, since those discussions
are prevalent everywhere, we will instead focus on the importance of mental
capital, since this is a less-discussed, but perhaps even more important
issue. Mental capital refers to the psychological strength and confidence of
a trader. If this is lost, a trader is ruined. Thus, it is absolutely
essential that mental capital be protected at all costs.
The connection between mental and financial capital is
very close. When a trader suffers a drawdown in his or her account,
instantly his or her mental capital will take a hit. If the drawdown is too
big, it will be enough to completely drain the trader of mental capital, and
this is the point where most traders quite and give up trading and
Thus, a trader must answer the question of how he or she can
protect mental capital at all costs. The answer to that question is to trade
very conservatively. If extremely small positions are taken relative to
account size, a loss is never going to threaten a trader’s mental capital.
In fact, it is essential that new traders trade with a position size that
enables them to be completely emotionally detached from the trade. If a stop
loss is hit and a trade realizes a full loss, it must be a dollar amount
that will not damage the traders psyche.
This is how one protects one’s mental capital. Then, as
confidence and consistency build, a trader can begin to increase the amount
of risk on each trade. Taking too much risk per trade is one of the most
common pitfalls of a new Forex trader. Every trader’s risk profile is different, but it is a good
idea for a new trader to never risk more than 1% on a trade. This will allow
complete emotional detachment from each trade, and it will help build
confidence and consistency over time.