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Good Habits

  
  Education
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When a new trader comes to me for advice, quite often they have suffered initial losses from their trading activities (sometimes heavy ones) and have not really had a focussed overall trading plan set out, or if they have, they’ve not followed it.

Even if you start trading with limited capital, it is important that you start ingraining good habits as early as you can. Principal amongst these is ensuring that you do not trade too large positions relative to your overall equity. 

Depending on your chosen method of trading, transaction costs can also eat into a small account, and the trading vehicle you choose to use should be carefully considered.

However, it is a well known maxim that the vast majority of new traders blow up their accounts within 6 months. This is not necessarily as a result of their method of choosing their entries and exits (although that undoubtedly helps) but more as a result of risking way too much on each trade, or in extreme cases having a complete disregard for risk.

Trading is a marathon not a sprint, and to stay in the game you need to exhibit strong risk control right from the off. The sooner you can ingrain that in your method and your mind, the better. Even the best did not necessarily get a grip on risk control early in their careers – in Market Wizards Paul Tudor Jones talks about losing 70% of his equity on a single trade relatively early in his career. It was only after that experience did he go away and implement rigorous risk control.

From having risk under control, unemotional trading decisions can be taken, improving your mindset and allowing you to follow your system with no risk of self-sabotage. Allied to a proven method for selecting entry and exit points, you will be well on the journey to trading success.

6 Types of Traders

  
  Education
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  • Pretrader. Everything is new at this stage, and everything is difficult. This is the point where the trader is learning the very basics of charting and of market structure and is also just starting to explore the marketplace.
  • Novice trader. At this stage, traders are not trading to make money; they are trading for experience and to begin to deal with the emotional challenges of trading. One of the main signs of progress in this stage is that the trader will start lose money more slowly than before—still losing, but losing less often and less consistently.
  • Early competent trader. The first step toward making money is to stop losing money. A trader whose wins and losses balance out (before commissions) has taken the first steps to competence. (At this stage, the trader is still losing money due to transaction costs and other fees.)
  • Competent trader. The first stage of real competence is achieved when the trader is able to cover transaction costs with trading profits. Reaching this stage may take a year and a half to two years, or more. Consider this carefully—two years into the journey a realistic expectation is to finally have accomplished the goal of being able to pay for your transaction costs. This may not seem like much, but very few individual traders ever survive to this stage.
  • Proficient trader. Here the trader starts making money. Errors and mistakes are far less frequent, but, when they do happen, they are corrected and reviewed, and the lessons are quickly assimilated. The trader has been exposed to the stressors of trading so many times that they have now lost most of their emotional charge and is able to approach the markets in an open, receptive state. As competence grows, the trader can look to manage more money; developing the skills of trading larger size and risk becomes a focus.
  • Experienced trader. It is difficult to imagine a trader becoming a true veteran without living through a complete bull/bear market cycle—about a decade in most cases. This trader has finally seen it all and has also become cognizant of the unknown and unknowable risks that accompany all market activity. It is possible for developing traders to gain much of this veteran trader’s knowledge through study at earlier stages of development, but there is no substitute for experience and seeing events unfold in the market in real time.
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