Mistakes of novice traders
There are many so called opportunities on the internet promising vast riches for little work in the area of forex trading and futures trading for novice traders. Statistically 95% of beginning forex traders fail and quit. In this article I hope to provide a little sane advice, to increase this percentage for the good of all.
If you are like me you were attracted to futures or forex trading because both financial arenas offer highly leveraged results, which means that your profit “potential” in the short term seems to be very high.
Human emotion such as hope and greed trigger at this stage as you see an opportunity to escape your daily grind, and get a better life for you and your family. There is nothing wrong with this, but it is at this point that I need to inject a dose of reality.
Remember – 95% of all forex novice traders fail! I’m going to try your patience and repeat this.
95% of all beginning forex traders fail! This also applies to futures trading and just about any form of speculation.
The exact reason for this is that they have been sold an idea – a potential for profit and they just look at the goal. Now this is fine, but all goals to be achieved involve doing something.
There are no free lunches in this world.
This is the point that is not confronted. You absolutely MUST confront this point if you want to have any chance of success.
We have a couple of things working against us and it’s not just the skill of trading that needs to be developed.
- We are not used to getting something for nothing. Even if we win in trading we will believe that we just got free money and will unconsciously give it back.
- We do not have the experience, even though we may have the education.
Attention novice traders! Knowledge without experience is shaky!
Therefore, to counteract these negative factors, we must have at least 2 things in place.
- Trade a demo account for at least a few months until you can profit consistently from that.
- Discipline to follow a trading system
- A Money Management plan and policy.
Without taking at least these steps you are on very shaky ground and could be heading for the 95% class very fast.
Novice traders have to focusing on the Process
Just like any other business, to become a good trader you must focus on a solid process. Result will not come instantly. Most businesses take quite a bit of time before profits come, and many, many more businesses fail completely. Trading is no different. Results will not come instantly, and if they do it is likely due to luck. Without understanding how the markets truly work and developing a winning process, the results are based on chance, not skill.
In order to build a winning process for trading the markets, try using these three goals. These may not seem like goals at all, but in fact are very hard to do, and even professional traders battle with these issues throughout their careers. Focus on mastering these areas from the very beginning, and positive results are more likely to ensue.
Always Have a Plan
In business school, you are taught that to start a business you need a business plan. Trading is a business. Therefore, every time you trade you must be trading according to a well thought out and calculated plan.
The plan should include how trades will be entered, exited (profits and losses) and how money will be managed. The plan should be very detailed, outlining the markets that will be traded, risk parameters, if filters will be used on trade signals, what constitutes a trade and exit signal, position size and what market environments will be traded (and how that will be determined) such as ranges or trends.
Learn NOT to Trade
Especially when a specific dollar amount is the goal, traders will push to achieve that goal even when opportunities are not present. The market does not present statistically probable trading opportunities at all times there are often times when you will be far better off sitting on your hands or watching TV than trading. This does not sit well with most people; they want to continually be doing something. In the markets this can slowly (or quickly) erode profits that came during good trading times.
When, and when not, to trade should be covered in detail in the trading plan. Yet, trading during slow times or making impulsive trades outside the scope of the plan is such a common issue that it deserves special attention. Make one of your goals to be as disciplined as possible, only making trades that are outlined in the plan.
Keep it Simple – Avoid the Mysterious
A complex strategy can be very alluring. Many people believe that because something is complex it is more likely to work than something that is simple. Avoid getting too fancy with your analysis and trading strategies. As you progress, avoid the desire to make a winning trading plan more complex, usually this only results in destroying the profitability of it.
If you like the stock market, stick with trading stocks. If you like currencies, then trade FOREX. Focus on only one market and a couple of simple strategies when starting out.
The goal here is to avoid constant tinkering in order to improve performance, or continually switching markets, strategies or analysis methods. Stick to the plan. If it occasionally needs to be reworked a bit that is fine, but keep the revisions simple and avoid getting overly complex. (Source: Investopedia about novice traders)