Just about every new trader who launches into trading before doing the proper homework ends up ‘blowing up their account’ which is generally considered suffering a 50% or greater draw down from their original equity starting point. Some of the signs of being in danger is just trading your opinion with no regard to finding a proven methodology to trade. New traders in danger have no trading plan, no understanding of risk/reward ratios or even more importantly the odds of their own risk of ruin based on their position sizing and capital at risk in every trade. They also have no idea of what their advantage is over all other participants, they have no edge. The main angle of their trading is simply their own unwarranted belief in their own cleverness. Danger! Danger! This random trading is pure gambling and we know how few gamblers leave the casino with their winnings.
Many new traders, even many of the greatest legends of trading initially blow up their accounts, learn many lessons and do come back and win. Here are the 10 lessons that enable many losing traders to come back in the game and end up with six figure accounts or even millions from some simple changes in strategy.
- Risk no more than 1% of your total trading capital per trade. Use stop losses from your initial entry.
- Only enter a trade when you believe that the profit potential is much greater than the down side based on historical performance.
- Learn to read what a chart is saying, trade the actual chart action not your own beliefs.
- Create a defined trading plan listing what you will do before the trading day begins, position sizing, entry points, risk per trade, your watch list, etc.
- Discipline yourself to follow the plan you create.
- Trade a size you are comfortable with, one that does not bring in strong emotions that distort your trading.
- Treat all your capital as your money, do not get reckless with ‘the houses money’ after some nice wins.
- Be a smart trader not a random gambler. Treat trading like a business.
- Quit believing stocks are too high or too low, stocks are at all time highs or lows for a reason and tend to continual on that path.
- Trade with the trend because you do not have a crystal ball.
- Have a strong faith in your ability as a trader AFTER you have done your homework.
- Develop complete confidence in your trading methodology AFTER you have researched historical performance.
If you have been knocked down, and most of us have, get up and get back in the game. If you don’t quit, you will eventually succeed. Consider your trading losses tuition toward your stock market master’s degree.