The Three Most Asked Questions From New Traders
It seems every day some new and up coming superstar day trader
(ok wannabe superstar day trader) asks me the same questions. It
always strikes me as funny that everybody always seems to have
the same questions when to me the answers just seem so obvious.
I will admit I've been trading for a while now and I've seen and
read all the doom and gloom numbers about how 90% of all day
traders bust their accounts in the first year. Why? I mean
seriously why does this keep happening over and over again? I
think it boils down to a couple of really simple but important
rules that too many new traders either don't learn soon enough
in order to save some of their trading capital. Or they don't
really understand the concepts. Let's look at a couple of the
major ones that you have to understand and have mastered before
you can really hope to earn a living at this day trading game.
First of all and I know this will ruffle some feathers, I am not
a big fan of demo trading accounts. I know some old time traders
swear by them. But the way I look at it, is if you want to demo
trade to understand how your platform works, how to place
different types of orders etc, ok do it. But if you honestly
believe that placing fake trades with fake money is teaching you
anything of value well you are going to bust your account and
likely sooner rather than later. Why you ask, well because when
you're in a live trade and you have "real" money on the line you
react much differently to being in a loss position than when
it's play money. Oh I can assure you as strong willed as you
think you are, when that first trade moves in a hurry against
you and you see the loss mounting I don't care how experienced
you are panic does start to set in. So how do you deal with this
and all the other head games that the market plays on you?
Rule number one, risk. Yes risk you never ever risk more money
on any one trade than makes sense. Of course we all have
different levels of risk tolerance that goes without saying. But
if every time you open a trade you have your whole bankroll
riding on the trade how many times do you think you can be wrong
before your trading days are over and you're looking through the
want ads again? I suggest you never risk more than 5% of your
account on any one trade. That means whatever you are trading
you set a hard stop loss that if hit would not eat any more than
5% of your capital. I know some people are even more strict and
wouldn't suggest more than 2 or 3% but % is fine in my eyes.
I know of a couple of traders that don't think twice about
putting 40 or 50% of their account on the line every time they
open a position. Well all it takes is two or three bad trades in
a row and poof they are finished, account busted. Let's look at
some numbers just for the same of argument. I like to trade the
S&P Emini, each point has a value of $50.00 so if I set a stop
for 2 points, trading 2 contracts I am willing to risk $200.
Using my rule it would mean that I want at least $4,000 in that
account to open that trade. I know that might sound like a lot,
but trust me on this it's more than possible to have four or
five bad trades in a row. Then what? Well then you dig out those
want ads again.
Which brings us to most asked question number two, losses. Yes
everybody has losses, I do, you will even the most experienced
trader on the planet will have losses. The sooner you accept
that and move on the better off you will be. You can't beat
yourself up over having a couple of losses. Try not to look at
them as losses, look at them as business expenses. They are just
a part of doing business, nothing more nothing less. You could
see a market that looks setup perfectly to make a move all the
planets have aligned and sure enough you jump in and get your
fill. Only to have the market turn the other way and take off
like a Jack Rabbit, it happens far more often to us than most
traders would like to admit. You can't take losses personally
you can't try to trade your way out of them and you can't
control when they are going to happen. So just don't beat
yourself up, take your loss chalk up to a learning experience
and move on. Sometimes there isn't even anything to learn. You
made the right move everything looked good, the market just
turned. It will do that more than you care to think about.
Most asked question number 3, what's the best system for
trading? Well the best system for you is your system. Let that
one sink in for a bit. There are as many systems out there as
there are traders. They aren't all perfect and what works for
you might not work for me or anything else. The one thing I can
tell you, there is no holy grail of systems. They all can be
used by just about anyone; they just all need the personal touch
of the user. A system working for a week or two or eight does
not making it a winning system. All systems have their good and
bad points; none of them seem to work in all markets. There is
so much to choose from between systems and how to use them I
think I'm going to make that a topic for an entire newsletter
all by itself. The bottom line about systems is to do what works
for you, learn what you like. Do you like swing trading,
scalping, intra day...whatever you like there will be a system
you can buy to get you started down the right path while you
figure out all the nuts and bolts.
I hope this has giving you a little bit of insight into a long
term successful trader's mind.
Check back as I'll post more once I have some time to put pen to
paper a bit more. Take care and thanks for reading.