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Before you start trading there are 3 most important things that you have to know. If you go blind and open an account, there is the high chance that you will get burnt and badly at that! Wouldn't you agree that the best prepared trader is the most profitable trader?The 3 things to know before you trade are, money management, trading psychology and a statistical edge. Let's explore in greater detail what these 3 important elements are and how they affect your trading success.
The first of the 3 things to know before you trade is a good working knowledge of money management. Money management is not about how to save your money in a bank account. The main focus of money management is all about making sure that you can grow your account consistently and profitably.
How it does that is that money management ensures a good risk versus return ration, it also limits leverage and margin overexposure and at times implement an exit strategy via a stop loss. Another key aspect of money management is position sizing. This is where a trader breaks up the account to diversify and positions the smaller amounts to the best advantage.
It is not easy to master money management, and many traders never bother to implement a money management plan at all. History has shown that these traders very quickly get run out of the business of trading within 6 to 9 months.
The second aspect of trading comes from the mind. It is all about psychology, all about how you as a trader handle your emotions, how you deal with losses and with gains. If you go to any trader's fair, you will realize that 99% of the booths there are for the ultimate trading plan. And maybe 0.01% or less is dedicated to the formation of a trading psychology. Regardless of what sort of trader you are, you cannot escape from your biggest enemy...yourself. To be profitable, a trader must first be able to control the emotions that lead to decision making.
The 2 most dangerous emotions that afflict a trader are fear and excitement. These directly influence the way a trader trades. If you are afraid of losing then you will give up a lot of good profit opportunities. If you are too excited or confident then you will not be able to stick to your trading rules which lead to a loss.
Psychology is not only concerned about just emotions, it is also concerned about the discipline factor. To be a good and profitable trader, discipline is crucial. Unfortunately not many traders can claim to be totally 100% disciplined. Luckily there are many ways to build a disciplined trader.
Lastly is a statistical edge or more commonly know as a trading plan. Most traders would have a semblance of a plan, but many actually do not have a well crafted trading plan at all.
I have seen some pretty half baked plans that traders try to use on the markets. There is a saying that trading is very much a 50/50 game, and that win or lose it is very much like a coin toss. This is theoretically correct but if you had the opportunity to increase the chances of wining, wouldn't you do so? I know that I would for a fact!
A good trading plan comprises of several components, 1) technical analysis, 2) fundamental analysis, 3) clear entry and exit signals and 4) secondary confirmation signals.
There is really too much to write in this article on how a proper trading plan should be structured. Just bear in mind that if you only focus on one aspect then your plan is flawed. You would be better off with the coin toss...
The 3 things to know before you trade are before you now. Since you have read so far, ask yourself in what area are you lacking? Then quickly get some knowledge on that area before you trade. The market is always there, there is never a hurry to throw away your hard earned cash due to a lack of knowledge.
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