BEGIN WITH HUMILITY
This is very important when you are starting your trading career. You must come to terms with the fact that you are a small fish in a big ocean. The big fish will happily enjoy you as a little snack. When you enter the Forex market most of the liquidity is coming from big banks and experienced traders. Don’t for a second start off by thinking that it will be easy to take these big traders money out of the market. What you have to learn is to swim along side the big fish, catch the same currents they do, don’t swim against them or they will eat you up in passing.
A funny misconception is that these big traders must have access to some holy grail strategy or use some secret indicator, but this is plain and simply not true. Online you can find access to daily bank analyst reports on currencies. Analysts at the biggest banks in the world generate these reports which are then sent off to their trade desks for the bank’s traders to consider. In these reports you will find simple, but proven technical analysis techniques – most commonly horizontal support/resistance, identification of trading ranges, Fibonacci, and fundamental themes. Begin by accepting that the other participants are highly experienced in the market and then learn to trade like them. They make money because of experience, not because they hold a holy grail or secret indicators.
EMPHASIZE EQUITY MANAGEMENT
It is crucial that as a beginning trader your emphasis is not on how much you can make, but rather how you can properly manage what you have. This is most likely to be the downfall of traders. It would be common place to see a starting trader risk their entire account on one or two positions. This is not the way to a sustainable trading career and this is not how the professional traders you are up against in the market manage their risk. At some point in your trading career you will likely have a string of bad trades. A reasonable number might be 10 losing trades in a row. Are you managing your equity in a way that you can survive this?
The solution is using simple formulas to calculate your maximum risk per trade and total risk in the market at any one time. Doing this is not difficult, but you must have the discipline to follow through with it on each and every trade.
CREATE YOUR MARKET LENS
Many fail to realize that when you open your charting software and pop on the latest hot indicator or charting tool you’ve heard works so well, you are extremely unlikely to see much success from it. This is because an indicator on a chart does not provide you with a market lens to trade from. Your market lens comes from experience. It comes from knowing how the market behaves around your chosen framework.
There are many traders that are profitable with various indicators or tools such as fibs, pivots, price channels, MACD, etc. But the tools they have chosen are not what is making them profitable. A common theme between successful traders is that they have the experience of seeing how the market behaves around their chosen tools and framework, day in and day out. The only way to achieve this is to stop jumping between tools and select those that are based on logical reasoning, understand how they work, then spend time in the market experiencing them.
OPERATE LIKE A SURGEON
It should be your goal to take your pips out of the market with precision, the same precision a surgeon must use with his scalpel. Traders who don’t treat each trade as a business decision by calculating their risk and defining entries and exits, open themselves to big losses when a trade goes bad.
Once again it is a novel concept which you will hear again and again, but for some reason it is difficult for many traders to exercise the discipline to follow a plan for each trade. Instead what often happens is what I call the “Lazyboy Trade.” The trader sees a potential set-up, Decides on some arbitrary sum to buy with a quick guesstimate, then carelessly gets in the trade without analyzing risk and having an exit strategy. The Lazyboy Trade may work out a few times solely because of luck, but eventually the trader wakes up from a nap to find themselves under water in a position and that’s the end of their trading career. Now there’s nothing wrong with trading from your Lazyboy, but be sure you never partake in the Lazy Boy trade and you must exercise discipline each day to keep your account healthy.
MAINTAIN YOUR MIND
Entire books have been dedicated to the subject of psychology and its role in trading. That doesn’t mean they are all going to help you, but you should take this as a sign that the subject is not to be ignored. Like a professional athlete must maintain their fitness at a level that allows them to compete at the top, we must maintain our mind because it is relied on each and every day to trade at the top of your game.
This comes down to a few things. First you must understand the role psychology plays in trading. Second you must make it your aim to never stop learning. You cannot get yourself to a certain level and then become complacent. Your entire career in this industry will be a learning experience. Until the day you stop trading you must be prepared to learn lessons from the market and be willing to do R&D and testing of newly gained knowledge, just as a business would Invest in R&D.
EXPECT THE UNEXPECTED
I’m writing this at the end of 2008 which has been quite a wild year in the markets. We’ve seen bank runs followed by bail-outs, brokerage bankruptcy’s, government intervention in free markets, housing bubbles exploding, and a global deleveraging of the financial system of historical proportions. At the beginning of the crash it seemed like every other week the market was being saved by rumors of Warren Buffet buying out struggling companies. Now we see pundits questioning the savvy of the oracle himself as he loses large sums on the same derivatives he once criticized as a bad idea and sees his prized AAA credit rating for Berkshire being threatened. Did anyone expect to see that?
These are indeed interesting times, but there is one thing every investor needs to learn. Expect the unexpected and do not get wrapped up in the euphoria of those around you. There will always be bubbles, crashes and threats to your profitability, but as long as you maintain and objective outlook and think for yourself you will have a feast when there is famine for those who are caught up in the hype.
Allow Yourself To Succeed
By putting in the effort to BECOME a trader you allow yourself the opportunity to one day evolve from saying “I am going to become” a trader to “I am a trader.” And that is the ultimate reward.
To say “I am a trader” is a great privilege and achievement, it means you have done something that around 95% of those who tried could not. Congratulations to those who can make this statement and for those just beginning this journey start your evolution by allowing yourself to BECOME a trader.