Trading is one multi-disciplinary field, in which psychology plays a large role. You’ve probably heard this before, but the failure rate in day trading is estimated to be around 80% to 90%. Now, there are some trading tips you might want to be mindful of, when you’re first starting out.
Trading requires dedication and discipline, many traders who are just starting out might get frustrated and make mistakes, and ultimately lose their discipline. Let’s take a look at some ways that you could potentially avoid failing at trading.
Learning from mistakes
First and foremost, if you’re a trader, you should should learn from your mistakes. Nearly all successful traders out there have learned from their mistakes, so they don’t repeat it over and over again. That ultimately pushes traders to the brink of failure. If you’re ever down money on the day, don’t think of it as a losing day and brush those trades off. You should keep a journal and reflect on your trades, in order to see what went wrong.
When you’re first starting out, you need to figure out your risk profile. In other words, you want to take into account the amount of risk you’ll be trading. Everyone is different, but typically, traders fit into three risk profiles: risk averse, risk-neutral and risk-seeking. That said, if you’re risk averse, that means you would look to take the least amount of risk as possible. When you’re first starting out, you would want to take a more risk-averse approach to trading. This will allow you to stick in the game for a longer period. In that time, you could learn the ropes, without blowing up your account.
Keep Your Emotions in Check
Let’s face it, when you’re managing money, and you’re down on a position, you’ll probably get a little emotional. However, when you’re trading, you have to take emotions out of the picture. Once you remove the emotions, you don’t make any irrational decisions when you’re first starting out. For example, let’s assume you’re in a position and allocated 20% of your portfolio to the position.
Now, assume you’re down on the position, and you look to get a better average price, so you pile into more shares. However, you don’t have a clearly defined edge in the trade. In this case, you would be trading off of your emotions since you would have been down on the position. This is something you want to avoid at all costs. If you catch yourself doing this, get out of the position, and journal the trade, why you were in, and note that it may have been an emotional trade.
Work With a Mentor or Team
If you’re a beginning trader, you would want to work with a team or mentor, who have been battle-tested and know the ins and outs of the markets. If you’re working with experienced traders, you could pick their brain to learn their thought process. In turn, you could potentially learn to build an intuition of your own. If you’re working alone, it’s pretty difficult, and having a mentor or other traders to work with could help you avoid some of the mistakes that they may have made when they were starting out. That said, this could save you a lot of time and money.
We’ve all heard this before…Buy low, sell high. However, when you’re first starting out to trade, you might get a little excited, and trigger happy. Consequently, this could lead to poor execution, leading to your orders getting filled at unfavorable prices. When you’re trading, your entries and exits need to be near-perfect, in order for you to potentially turn a profit. Now, you also don’t want to force trades. For example, let’s assume it’s a slow day, and there’s nothing going on. However, you see one potential stock to trade, and you get in, before a signal was generated by one of your indicates. If this occurs, you could potentially lose a significant amount of your capital, if you continue to be eager and trading off of ideas that might not fit your trading style or strategy.
Stick to Your Plan
Most beginning traders don’t have a plan…but don’t let that be you. If you do not have a plan, or have a plan and don’t stick to the rules, you could be in for a rude awakening. When you’re trading, you need to remain disciplined and stick to your plan. For example, if you’re only going to trade off of some technical pattern or fundamentals, then stick to that strategy and plan. It’ll take some time to develop a strategy and plan, but once you do, make sure you don’t deviate from your rules.
When you’re first starting to trade, it might be overwhelming, but you need to remain calm, patient and focused. The tips outlined above should get you started and potentially put you on the right path to success. Now, one thing is for sure, you should always look to work with a team or mentor when you’re first starting out, because that will help you with the steep learning curve in trading.
Jason Bond runs JasonBondPicks.com and is a swing trader of small-cap stocks.