Perhaps you’re completely new to trading … perhaps you’ve been gingerly stepping around the edges of trading for a while, but haven’t yet taken the plunge … or perhaps you’ve traded before but feel the need to ‘reboot’ after a tough patch.
So, where to start?
A glance at what our friend Google recommends would bombard us with information.
Technical indicators to learn … candlestick patterns to master … forex correlations to fathom …
But knowledge isn’t what it used to be.
I’m not quite old enough to remember when knowledge was locked up in monasteries and closely guarded by monks. But I do remember when it could be found in books and libraries.
Suggest to my kids that they look anything up in a book, and I’m met by groans and a chorus of Siri responses to whatever topic we were discussing.
My point is that filling our brains with data is not as necessary as it once was, and is only a fraction of the story.
So, if you’re fresh to trading, this is what you need to do …
1. Set your expectations
Take a look at what top hedge fund managers are achieving. And compare these to some of the claims that trading ‘gurus’ make. You’re probably looking at a range of 20% to 100% profits per year.
Bear in mind that those making higher percentages are more likely to suffer big losses too.
Whether you’re a hedge-fund manager or a home trader, you’ll have good months and bad months, good years and bad years.
Think about your financial goals. You can be ambitious here. Don’t hold back. But balance this with a realistic idea of how long this could take, and prepare yourself for the ups and downs along the way.
2. Gather knowledge
There are loads of great free resources on the internet aimed at people who are new to trading. My recommendations are the Trader’s Bulletin Spread Bet School (but then, I’m biased) and www.babypips.com, which has lots of good info on Forex trading (much of which is transferrable to other markets), although does have a US bent.
Beware of overloading yourself with trading tools. You don’t need to understand dozens of indicators to be a successful trader. What you do need is a good understanding of risk, and a willingness to practice and learn (often by your own mistakes).
Remember those fund managers and trading gurus? They all have access to pretty much the same data and knowledge base, yet there’s a huge disparity in their performance.
Knowledge isn’t everything.
If you haven’t already, don’t hesitate to get a demo trading account set up and to start making mistakes on it!
First off, practise opening and closing trades. Adjust stop levels and profit targets. Try setting up orders (buys and sells that are triggered when a price level is hit). Check how much you’re making or losing on trades. Is it what you expected? Have you understood risk, points, staking levels correctly? (When you’re new to trading, it’s all too easy to make a mistake with a decimal point and lose 10x what you’d thought you were risking – ensure you make these kinds of errors in a demo account!)
Once you’re confident with the nuts and bolts of placing trades, it’s time to get serious with your demo account. You need to start treating this like real money – and you want to start watching your account balance grow.
Now you need to start being disciplined with placing trades and keeping records of your results. I recommend using a spreadsheet for this (you can download mine here). Just relying on the track record on your demo account doesn’t give you enough detail to analyse what you’re doing right (and wrong). Which brings me neatly to my next point …
4. Find your mentor
For a while, last year, I had a personal coach. He wasn’t the kind of trainer who stood next to the weight machine urging me to do one more rep, but a guy who analysed the data off my smart watch, set me programs, and gave me a little pep talk over the phone on a Tuesday evening.
He wasn’t really giving me knowledge that I didn’t already have; but knowing he’d be checking my performance always spurred me to work that bit harder and to be more consistent with my training.
However, it felt like a lot of money to fork out for a bit of hand-holding, so I decided to be my own personal coach.
And – as trading is about making money, rather than spending it – I recommend you do the same.
Whether you’re new to trading or not, it would be nice to have someone checking our trades to tell us what we’ve done right or wrong. But learning to do this for yourself is a big part of trading. You’ll never stop learning, so you’ll always need to be checking your performance and looking for improvements.
To be a good mentor, you don’t need superior knowledge, you just need an objective and critical eye.
This is where it’s really useful to fill in comments on your results spreadsheet. That way, when you come to look through your results, you can be reminded what you thought about individual trades.
For example, comments like “didn’t like the risk-reward on this trade” … or “bad feeling about this trade as too close to resistance level” …. These are the kinds of thing that may come to be built into your trading, if you see them crop up again and again on bum trades.
You’ll also spot your bad habits in your trading record. Places where you’ve not followed your rules … you’ve over-staked … or gone ‘hunting’ for trades in obscure (often expensive) markets.
You can find some more guidance on how to ‘coach’ yourself here – which looks at the sort of questions we should be asking when we look through our trading journals.
Perfecting the blend
All four of these strands are vital to becoming a successful trader: expectations, knowledge, practice and mentoring. Some will come easier than others, which is why traders often get bogged down with one of these, ignoring the others.
I’d urge you to find a healthy balance, and you’ll get the pleasure of mentoring yourself to success.