Traders are not born – they are made
Starting out as a trader can be daunting. With so many strategies, principles and concepts to learn and choose from, it can be difficult to pick a path and stick to it.
Trading can also be an emotional roller coaster, taking you from the thrill of winning to the anxiety and self-doubt of losing in one short session.
An experienced trader knows how to stop emotion influencing trading decisions – becoming capable of jumping straight back in the markets even after a loss.
These are not skills that any trader was born with though. They are skills that are acquired through study, discipline and practice.
How to become a good trader
Learning to trade is not an easy journey, but it is one that many have made before you.
We will now look in more detail at some of the ways you make this journey easier.
1. Practice trading strategies
Just like a concert pianist has to work hard at perfecting the basics before he performs a concert, it takes practice and dedication to become a winning trader.
The difference with trading is that the process of practising – learning from your mistakes – can cost a lot of money. This can be psychologically and financially hard to take.
Demo accounts are therefore a must for beginners. They allow you test out strategies and different trading methods in real market conditions, but without risking real money.
2. Moving on to real money
After you have practiced your strategies and are comfortable with how to execute your entry and manage your trade, you are then prepared to work on the next stage of learning, which is to control your emotions.
Whilst a demo account can mimic the emotions that you feel when trading real money to a certain extent, you will not experience the full brunt of emotional influence until you move to a real trading account.
If you have practiced a strategy on a demo account beforehand, then you are in a better position to learn how to control your emotions, because you have practiced the decision making to the extent that it is almost automatic and you simply need to concentrate on taking a series of trades and get used to the emotions.
3. Break it into bite sizes
Experienced traders incorporate technical or fundamental analysis, risk management and strict entry/exit rules into every single trade they make.
They know that by applying each of these elements consistently, their trading will produce favourable results over time. They also know that skipping any one of these stages could ruin their strategy and lead to heavy losses.
If you are a beginner trader, trying to master so many links in a chain at the same time can feel overwhelming.
Therefore, don’t expect to learn a trading strategy in one go.
Rather, work on different elements of each strategy in bite-size chunks until you understand them and can fit them together like the pieces of a jigsaw.
For example, dedicate yourself to studying and experimenting with different money management principles until they feel second nature. Then move on to the study of entry or exit levels.
Approaching your education in this way will not only give you a much clearer sense of direction, it will ensure that you are making the best use of the time you dedicate to trading.
Of course, you will still have losing trades, however, as long as you know that you applied each trading rule carefully and consistently, any losses will be easier to digest.
4. Master your emotions
It is vital when trading to keep a firm focus on what you are trying to achieve long term.
Many traders start in the industry because the flexibility of trading for themselves might improve their lifestyle. Others do so because they want more control over their earnings potential.
Whatever your reasons for trading, remind yourself of them regularly. Write down your goals and stick them on your wall so that while you are learning and going through the difficult process of mastering your emotions, you can always refer back to your aspirations.
Reminding yourself, for example, that your whole reason for trading is that you can spend more time with your family can make it easier to put in perspective the disappointment and stress of losses when they do occur.
Reminding yourself of how much income you hoped to earn from your trading can also be a great way of refocusing your attention and getting you back into the market.
5. Take emotion out of your trading when you are actually trading
However, you must make sure that you are in a logical mindset when you are trading. You must be able to let go of emotions and you need to learn how to only think about the trade and only refer to your goals and dreams afterwards.
The reason why is that you do not want to influence your own trading. Take, for example, the scenario of experiencing a losing trade whilst thinking about the money that you hope to make with it. The losing trade now makes that dream seem further away and you are in danger of getting caught up in chasing losses.
This can lead to warped expectations, which can result in chasing losses.
One way you can overcome this is to write down your trade beforehand. By writing down your entry, stop loss and profit target on a piece of paper, you begin to switch your mind into a logical state and concentrate more on the trade itself, rather than what it is trying to achieve. You are then in less danger of becoming influenced by emotion.
6. Treat it like a business
Treating your trading like a business is an excellent way of helping to keep emotions at bay.
Write a trading plan that clearly defines your trading strategy, the principles it rests on and your targets.
Your plan should include a checklist of entry criteria that you consult before each trade. Having this written down can help you resist the temptation of making emotionally driven trading decisions.
Approaching this plan in the same way as an entrepreneur might approach his business plan can help clarify the reasons why you trade how you do, as well as highlighting any potential pitfalls.
In this lesson you have learned that
- traders are not born with the ability to read charts or keep their emotions at bay.
- these are skills that you can learn yourself, through study, discipline and practice.
- demo accounts allow you to test out strategies and different trading methods in real markets conditions, but without risking real money.
- you will only really learn how to control your emotions though when your own money is at risk.
- don't expect to master a trading strategy in one go – work on different elements in bite-sized chunks until you understand them and can fit them together like pieces of a jigsaw.
- remembering why you are trading will help keep any losses in perspective, and give you the focus to get back into markets after you have suffered a disappointment.
- learn to get your mind into a logical state by writing down your trade on a piece of paper. This can help avoid you being influenced by emotion during your actual trading session.
- writing a trading plan that defines your trading strategy, the principles it rests on and your targets will help you approach your trading in a detached manner and identify any potential pitfalls.