Know before you trade: the dangers that await
Trading is an endless sea of possibilities that is tempting in its apparent simplicity. So many people think they can become real traders after reading a few books or watching a training video or two. Indeed, things do look simple: find the right “figure” or wait for an indicator, open a deal – and watch the profits roll in. And while the market is earning money for you, you can check out the latest Ferrari online to spend your winnings on… but in practice, 80% of all novice traders lose money. You don’t want to be one of them, do you? Then you should pay attention to what many people do not pay attention to. Though they should…
Strategy and trading plan
You are really eager to start trading. We understand that. But common sense says, “look before you leap,” so you have to learn something about the exchange – a place where it is just as easy to lose money as it is to win. So you may have spent a few weeks trading with a demo account and ended up ahead of the game. But was your trading systemic, or did you just spend time learning the terminal and making deals at random? Even if your demo profits were the result of careful planning, you have to make sure your winning strategy is equally good in all states of the market – whether trending or flat. Find a way to test your system against historical data, to make sure your chances of winning are actually good.
Risk management. I repeat, risk management!
And I say it again! Everything you do in the market has to measure up against your appetite for risk. If you don’t follow this rule, it is only a matter of time before you go belly-up. This is one rule a novice trader must remember once and for all. Risk management is a major science, but you can start with a simple rule. Calculate your stop-loss level before you open a deal. And don’t ever forget to set it. For a novice trader, the loss level in any deal should not exceed 1% of the deposit. If you think the “stop” position will be greater – just don’t open that trade in the first place, you haven’t earned enough. Or reduce your position. Another method for calculating the risk level is to make sure the stop-loss does not exceed your average profit per deal. In that case, it will be easy for you to “win back” the losing trade.
The danger inside us
Inspired by your first success, you add more money to your deposit and expect to profit on every deal after that. This is probably the right thing to do, as a positive attitude is helpful in many areas of life. However, a trader’s path is not just about profits; losses and bad deals are inevitable. How you will react to these – you can’t exactly tell until it happens to you. All we know is that trading can be a very stressful profession, which puts your mind to the test. Can you stick to your trading plan under extreme circumstances? Would you try furiously to recover your losses when it would be better for you to calm down and take some time off from the market? Fighting yourself is the ultimate battle; only discipline will help you avoid the psychological traps of the marketplace.
Hardware and software
You are trading off a PC, aren’t you? What if your “trading equipment” suddenly fails? Or your internet connection dies just when you are about to open a deal? Or worse yet, your connection to the broker times out in a critical situation when you urgently need to close a trade? This situation is particularly unpleasant for intraday traders, who may find that even 10-15 minutes off of the market can prove fatal for their deposit. You must have a Plan B for this kind of situation: a mobile version of the terminal software on your smartphone, the broker’s phone number, an emergency backup power supply for your computer, etc. You should also keep your working computer in good health; and ideally have a separate machine for trading.
Who do you trust with your money?
This question may seem less important to a novice, but still: have you put enough thought into choosing your broker? Is the company licensed, reputable and regulated by the respective authorities? The broker agreement is basically your first deal in trading that will affect all of your future transactions. If the broker cheats you with quotes or trades against you, you are not likely to ever see your money again. So, if you are interested in Forex – look for European STP brokers that store client money in segregated accounts. Do some trading with a demo account, test the speed and accuracy of order execution, see if the technical support is adequate. Only then should you deposit your money and start trading.
And remember: you will have to work a lot before you can achieve success – mainly work on yourself. But the results – your financial freedom – are definitely worth trying for.