Trading begins long before you ever hit a button to place a trade. As much as being about the ups and downs of the markets, trading is also about mindset: get your head in the right space from the beginning and you’ll give yourself a better chance of success. The secret to it all is preparation…
1. Treat it like a business
Trading may seem like a hobby, but in many ways it’s more like a small business. To start with, both take a bit of capital to get going and both will probably absorb a lot more time than you first thought. Because of that, you’re going to have to give trading the appropriate level of commitment. You want your business to be around for a long time and you want it to be profitable but, as with any business, there will be successes and setbacks along the way. It's your job as the ‘CEO’ of your personal trading business to keep your eyes on the horizon and steer the ship safely through whatever gets comes your way – you might even have to deal with typical business things like taxes, income, expenses. Ultimately, if you do your job well, trading can turn into a real business.
2. Come up with a plan
Going into trading without a plan is like putting on a blindfold and walking into traffic – it’s only a matter of time until you get hit. What a trading plan does is give some context and direction to every small decision you make. For example, if your plan is to trade only a few key currencies but you find yourself being tempted by some more exotic pairs that you’re not familiar with, you need to ask yourself whether that’s going to help or hinder your overall strategy. Having a plan is simply a way of helping keep you focused on the bigger picture: what you want to get from trading and how you’re going to get there.
Along with planning, patience is critical too. It’s very easy to get tempted into overtrading or risking too much on a spur-of-the-moment opportunity. But by being patient and understanding that more, perhaps more appropriate, trade opportunities will arise, you’ll end up making trade decisions that are the better suited to your strategy and goals. Keep your plan in mind, keep your context, and you’ll be able to keep trading for much longer.
3. Understand risk
The upside of risky trades is that there is more reward. The downside is that you can get knocked out of the trading market in an instant, and that’s a hefty price to pay. New traders are particularly susceptible to overtrading or reaching too far, too soon, so it’s vitally important to gauge the levels of risk appropriate to you before you commit to a trade.
Spending time in a Demo account is an absolute minimum requirement so that you can get a feel for how trading works. In a Demo account, try to trade in the same way, and with the same amounts of virtual funds, as you might in the real world. That will give you the most accurate picture of how risky your trades are to your bottom line. If you need to change the way you approach risk or change levels of leverage, then you’ve got to step up and do it because no one else will do it for you.
4. Know your limits
Before you start trading, know how much you can afford to lose. It’s not a doomsday scenario, simply a pragmatic approach. The nature of trading means there’s always the possibility of a trade going against you. The way to deal with that, and prevent it doing any significant damage, is to know your limits.
Working backwards, knowing know how much you can afford to lose means you’ll know where to place a Stop Loss (and you should always use a Stop Loss) and at what levels you might need to pull the plug on a downward trade. Accounting for losses before you even enter into a trade can be the difference between a manageable loss and a catastrophic one for your trading account.
5. Never stop learning
Even the most experienced traders don’t know everything about the markets, but that doesn’t mean you should ever stop learning; the more you know, the better position you are in to profit from trading. Some ways to keep raising you knowledge and performance are:
You should always remain critical of your performance and keep your plan in mind, but looking for ways to further your knowledge is only likely to benefit your bottom line in the long run.
RISK WARNING: Trading in Forex and Contracts for Difference (CFDs), which are leveraged products, is highly speculative and involves substantial risk of loss. It is possible to lose more than the initial capital invested. Therefore, Forex and CFDs may not be suitable for all investors. Only invest with money you can afford to lose. So please ensure that you fully understand the risks involved. Seek independent advice if necessary.