Many times, when we’re at cocktail parties and other social gatherings, we tend to hear conversations about trading and how people who have dabbled in the markets have lost money.

Why do so many of these traders lose money? Some statistics show that over 80% of all traders lose money. We all understand that there is no magic formula to be successful in these difficult markets. So how could we be part of the other smart 20% of successful traders?

Here are five key steps that one can follow in order to be consistently profitable.

STEP ONE: THE METHOD

If our goal is to become a successful trader, we must have a clear and concise method of trading. In order to have that one must have a clear and precise way of looking at and reading the markets. Guessing or going by gut instinct might work sometimes, but if we don’t have a specific method, then we don’t have a way of understanding when we have to buy and when we have to sell, i.e., we won’t be able to correctly identify the trend.

The way to go about this is to write down the trades along with the reasoning for doing them. This will help us to understand if we used a correct reasoning or wrong. We need to define what our analytical tools are and how to use them. The idea is also to keep it simple and not get too complicated.

STEP TWO: DISCIPLINE

Once we have a method established, we need to have the discipline to follow through with that method. It is that discipline that will help us to become a good trader. Should we make a mistake, it should always be on the side of discipline. In the course of time it will clearly pay off good profits. The formula for success is to consistently follow and apply a proven method.

STEP THREE: BE REALISTIC

One has to be realistic and not believe all the noise that we read and hear on how to become wealthy overnight carrying low or zero risk. Once our method is established and we follow it with our discipline, we can expect to have some good returns. These returns will be according to the money that we invest in the markets. If we want more profits, then we have to undertake more risk. It’s that simple.

So let’s not get too greedy and understand that the race is won by trading slow and steady. Being realistic is the best way to avoid the downfall many traders face due to becoming overconfident. Sometimes we get carried away by overconfidence and this clouds our judgment and makes us lose money.

STEP FOUR: PATIENCE

In this business it’s very common to get the feeling that we’ve missed the train and lost an opportunity to make money. It’s at this moment that we get into a hurry and try to rush the next trade. We then start taking shortcuts on our own methods and then we start taking trades of lesser and lesser quality, and this inevitably ends up with overtrading.

We have to remember that there is no reason to worry about missing the next great opportunity, because there is another one right around the corner. As the proverb goes “the next bus leaves after 10 minutes.” We just have to wait for it and follow our plan. This way, we’ll have a cool mindset and we will be able to spot it easily.

STEP FIVE: RISK MANAGEMENT

Many traders tend to be over aggressive in their trades.  A good rule of thumb is to never risk any more than 2% to 3% of our portfolio.  If we have a small trading account, then we should trade small.

The bottom line to becoming a consistently successful trader is longevity!  If we keep our risks small we will be able to weather the rough spots and we will be having the capital to keep coming back to the market.  If we’re risking 25% of our portfolio on each trade, then it will only take 4 consecutive losses for us to be completely out of business.

Once again, let us remember the story of the tortoise and the hare… slow and steady wins the race!

These five steps will allow us NOT to get caught up in the 80% of losing traders and help us to share the happiness with the remaining 20% successful traders.

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