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by 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 itself. 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. Then, 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 profitability.
Mental Capital Is Even More Important Than Financial Capital 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 investing. 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. |
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