Oscar Wilde once wrote “Experience is one thing you can’t get for nothing.” When it comes to trading, I couldn’t agree more. Trading experiences are earned.

Although meaningful experiences are earned, experiences can also be borrowed. Based on my own personal trading journey, and the experiences I’ve had as a trading coach, I believe the following six things need to be understood in order to achieve your goals as a trader.

1. SET GOALS AND HAVE REALISTIC EXPECTATIONS

It’s said that more than 90% of all traders lose money. Although it might be hard to pinpoint an exact number, I’d say that based on my experience the number is pretty accurate.

Why such a high failure rate? It’s because too many traders have unrealistic expectations. They are attracted to the potential financial rewards of trading, but have no idea how to avoid being one of the 90%.

So first things first. What are your expectations with trading? Are they realistic?

If you believe you can make a million dollars with a $500 Forex account, you’re probably in the wrong business. If you believe that with hard work, time and discipline you might be able to succeed as a trader, you have the right mindset.

Consider the following goals and expectations:

Goal 1 = Proper education (developing a plan and learning to make money on a simulator)
Goal 2 = Transition to a live account (identify your risk limits, and learn how to not lose money)
Goal 3 = Conservative weekly goals (learn to make conservative consistent profits)
Goal 4 = Aggressive long term goal or target (a financial goal using proper money management)

Now make these goals S.M.A.R.T. Goals (Specific, Measurable, Attainable, Realistic, and Timely). With S.M.A.R.T. goals you are able to set time frames so you can track your progress, and adjust your goals and expectations when necessary.

2.  “KNOW YOUR PITCH”

One of the biggest differences between Little League baseball and the Major Leagues, is that a Little Leaguer swings at everything! When you’re younger and less mature, you just hope that you can connect with the ball and make it on base. On the other hand, professionals know how to be patient and are willing to wait for the best opportunities.

The same can be said for trading. Not everyone can handle the pressures of being a scalper, and not everyone has the patience to wait a year for a trade to be successful. So find your pitch.

Try to find a setup or method that works well for you, and fits your personality. Maybe it’s a daily gap fade strategy, a simple trend following strategy, or even something basic like trading the Dogs of the Dow every year. If you don’t have a solid setup that you can execute flawlessly with complete confidence, find one! Then build your trading plan around your pitch.

3. KNOW YOUR NUMBERS

As a coach I’m often approached when things are going bad. The scenario is usually the same…A trader has a great start and sees some nice profits early on, but eventually experiences a string of losses. The question I get is usually “What am I doing wrong?”, but the real question should be “Are these losses normal?” In order to answer this question, you need to know your numbers.

Knowing your numbers means testing a strategy before trading it live. This testing should provide you with numbers like your average profit per trade, your Max Drawdown, and the number of losing trades in a row.

When you know your numbers, you are in a position to understand and tolerate losing situations that might be expected with a strategy. Although past performance is not indicative of future results, it’s all you’ve got unless you’ve been trading a strategy live and can rely on live experiences.

4. OWN YOUR PLAN

A lot has been said about the importance of a plan. As a coach I’ve seen some great trading plans come across my desk, but if it isn’t a plan that reflects your expectations and experiences, it’s going to be a plan that’s impossible to execute.

If you’re new to the idea of a trading plan, it’s more than just a trading strategy. A trading plan is a Mission Statement, Business Plan, and Strategy(s) all rolled into one. A trading plan is a living document that encompasses both your trading experiences and expectations and for this reason, it cannot be copied. You can borrow ideas from other traders, but you’ll always struggle unless you make them your own.

5. KNOW WHEN TO HOLD EM’, KNOW WHEN TO FOLD EM’

I believe Kenny Rogers was a trader. At least one at heart. His song “The Gambler” holds so many trader truisms, he just had to be singing to the soul of a trader.

Unfortunately most traders hold em’ out of fear, and fold em’ because their broker says they don’t have enough money in their account to continue to trade. But knowing when to hold em’, and when to fold em’ isn’t as hard as it may seem.

I’ve learned that simple rules are often the most effective. If you “know your numbers” you should know the Max Drawdown of the strategy that you are trading. Take this Max Drawdown and double it. If you’re experiencing a drawdown that is normal, hold em. If you are experiencing a drawdown that is double your tested drawdown, fold em.

If you need to fold em, stop trading and spend time re-valuating your plan. More often than not, you’ll discover that there were issues executing your plan, and not a problem with the actual plan itself.

6. UNDERSTAND THE POWER OF MONEY MANAGEMENT

Are you familiar with the Ralph Vince Experiment? Ralph Vince conducted an experiment with 40 individuals that held PhDs. These individuals were given $1,000, and a strategy that was guaranteed to have a 60% winning percentage after 100 trades. The risk was equal to the reward on every trade, so the only decision to be made was how much to allocate to each position.

Can you guess what happened? Even though these individuals had a strategy that was guaranteed to make money in the long run, only 2 of the 40 traders were profitable after 100 trades. This meant that 95% of the traders lost money! Why was this so? It all comes down to money management.

Money management is one of the most critical components to a trader’s success. As Ralph Vince demonstrated, a good strategy can be destroyed by improper money management. On the other hand money management can be the difference between modest gains and phenomenal returns.

If you’re new to the idea of money management, start with the 2% rule. Only risk 2% of your trading account on any given trade and be conservative. If you’re trading leveraged markets like Forex or futures, look into the idea of Fixed Ratio Money Management, a strategy for increasing position size based on profits.

WHAT ARE YOUR EXPERIENCES?

Does this list resonate well with you? What can you add to the list from your experiences? What can you share to help other traders avoid some of the roadblocks that you have encountered as a trader? Share a comment below.

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