01 SKILLS ASSESSMENT
This part of the experience of trading is the moment when you step back and take a look at yourself in the mirror and attempt to ascertain if you are truly ready to start trading in the markets. It is a time when you look at what you have built as your strategy and try to decide if it truly contains all of the elements necessary to make for a good strategy.
You need to be brutally honest with yourself when looking over these goals. It is very easy to get excited about your trading abilities and think that your strategy is rock solid when it really isn’t. When you are going through the skills assessment process, one of the things that you need to do is back test your strategies.
This means that you take the parameters of how you would like to trade and see how that strategy would have done in market conditions that have already occurred. You should back test for at least six months back, and you should try to find at least 100 trades that would have been entered under your trading rules.
Ideally, you will find even more trades than that, but you need to start with at least that many. Once you have those elements in hand, then you can start to decide if your trades make sense against real-world conditions. Simply accept the rules no matter what they show and tweak your strategy if necessary to make sure you get something that works well for you in the event that your original plan is not quite as effective as you would have hoped.
02 MENTAL PREPARATIONS
I know what you are saying: “I am ready to trade right now!”
You are excited about putting your skills to the test, and you want to see if what you have come up with will truly work in the markets. It is wonderful that you are excited about beginning your trading journey, but you need to try to calm yourself and understand that successful trading in the markets has a lot to do with how well you have mentally prepared to take on those markets as well. Say what you will about your strategy, but factors such as the following play a huge role in your success or failure rate:
- How much sleep did you get the night before?
- Do you have distractions around you that are taking away from your ability to trade well?
- How focused are you on keeping your emotions in check and letting your strategy play out for you?
You cannot skip over factors like these unless you want to end up with worse results than you otherwise would have had. People make the mistake of jumping the gun and getting overly excited about getting into the market all the time. When they make critical errors like that, they can sometimes cost themselves dearly on mistakes that never should have been made.
03 MARKET ENVIRONMENT
When the market gets very volatile, you might start to hear everyday people talking about what the market is shaping up to be.
They will offer their opinions about where they think it is headed. You might even be tempted to act on what they have to say, though you should probably not do that.
What you need to do is a self-check of where the market is at and how it has been performing. You cannot rely on the assumptions or calculations of another person. You need to see for yourself how the market is behaving and what you can potentially do about it. In other words, you should try to determine if you need to jump in and start trading right now or if you should perhaps take a step back and allow things to cool off to some extent before you take the plunge.
People frequently make the mistake of wanting to get too involved before things have truly settled down. That is an error every time, and you should not put yourself in that position if you can avoid it.
04 SET RISK LEVEL
One of the areas that many newer traders often forget to check in on themselves about is their risk tolerance levels. So many traders like to pretend like they have unlimited risk tolerance and that they aren’t bothered by swings in the market at all.
However, the risk of this is that they are probably more prone to making emotional decisions than they think they are, and they don’t properly examine their risk levels before they start trading.
All traders have to look at their risk tolerance levels very carefully before deciding how much of their portfolio to commit to a single trade, and it is highly recommended that traders never commit more than one percent of their portfolio to any trade.
Traders who are risking one percent or less on each trade can weather many more bad storms in the market than those who risk more than that. It is very easy to get caught up in thinking about how much money you can make on a given trade, but you should also think about how much you can lose as well.
05 SET GOALS
You ought to know how much you intend to try to get out of each trade that you make before you enter it.
You should have precise goals that tie into your risk/reward ratio for a given trade.
Put another way, you should never hop into a trade unless and until you know the point at which you will hop out.
Getting your targets in line like that is an important thing to do because you don’t want to risk taking a chance on a trade that you will change your mind about many times over. In other words, you don’t want to put yourself in a spot where you keep changing your mind about when to exit the trade. There is danger in doing that because you are more likely to change your mind based on emotion, and that never works out well in the long run.
06 DO YOUR HOMEWORK
Trading is supposed to be fun to some extent, but you aren’t making a profit because things are fun. Rather, your best bet is to do your homework and make sure you capture as much value as possible from your trading experience by having research at your fingertips that backs up every move that you make.
You should ask yourself the following questions before making a trade:
- Am I doing this based on real research?
- Am I confident enough in the trade to put a portion of my account at risk?
- What are my reasons for confidence that this investment will move the way that I expect it to?
If you have less than confident answers to any of those questions, do NOT place the trade.
You need to back up every move that you make in the markets with real research that you can point to. When that research is not available, you need to go back to the drawing board and figure out what you are doing. You might have overlooked something important that you shouldn’t have passed on.
07 TRADE PREPARATION
You need clear setups for all the trades that you intend to make no matter when you make them. You also need to be sure that you follow your own trading rules, and you need to set up plenty of visual and auditory alerts to aid in your trading along the way.
After all, you need to make sure your charts are appealing to look at if you are going to stare at them all day long and make trading decisions based on what you are looking at. You should keep that in mind as you prepare your next order.
Make sure your lines are drawn, your indicators are out, and you know what you want to do with your trades. You should not allow yourself to think that you can get away with trading profitably into the future if you don’t put some work into those trades before you ever make them.
The reality is that you will end up getting out too far over your skis, and you may end up losing a great deal of money along the way when this happens.
08 CREATE ENTRY AND EXIT RULES FOR YOURSELF
Play by the rules and you won’t get hurt.
You need great entry and exit rules when it comes to how you make your trades. Is there any sense in placing your trades if you don’t know when you are planning to exit the trade? Likewise, does it make any sense to not have a firm grip on when you will exit the trades that you have entered?
The reality is that you can put yourself in a very tough spot when you do not know where you would like to exit trades that you have entered. You don’t want to leave anything to chance because you will end up trading on emotion if you do that.
When creating entry and exit rules for yourself, think about how much profit is realistic to make off of each trade.
Note, this is not how much profit you would like to make on each trade, but how much profit you deem to be realistic for each trade. You need to be honest with yourself about what you are expecting from the market and set your exits at those levels.
09 KEEP ACCURATE RECORDS
Having an impression of how much you gained or lost in the market is not nearly enough to be a successful trader. You need to know without any doubt how much you are up or down.
The reason is because you need to evaluate the strength of your trades based on accurate records that reflect reality. If you cannot do that, then you are not going to have much success in trading at all.
Keeping accurate records means literally having a written record of every action that you take in the market and why you took it. There should be no question in your mind as to why you made a specific trade or what the end result of that trade was.
If you have an accurate record of your trades, then you will always know precisely when you made a trade, why you made that trade, and what it means for how you approach the market going forward.
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