Have A Trade Plan
The best traders out there treat trading like a business. If you are looking for a way to create a new income, you will need to map out your path to hitting your goals. There are two ways to gain experience:
1) Make decisions yourself and measure the outcome
2) Leverage the experience of others and learn from their mistakes.
You will likely gain experience both ways. Learning from the mistakes of others and collecting their wisdom is often incredibly less expensive than learning from your own bad decisions. That said, making expensive mistakes is a way that you often won’t forget the lesson.
Find something based on facts, that makes sense, and stick to it.
Start with a Practice or Demo Account
You can backtest and trade with “fake money” in a practice or demo account for free in most cases. If you want to know how your trade plan performs when the rubber meets the road, don’t put your hard-earned trading capital at risk right away, use practice money.
Everyone is different, prove your strategy works before putting your money in the live market.
Know When to Stop – Monitor Your Results
Many traders get wrapped up in their trade plan, “how perfect it is” and don’t monitor their outcomes. If you are following your plan and losing money, the best thing you can do is take a step back and figure out how to get the result you want by tweaking your strategy. There is no reason to continue diligently following a plan that will only lose you money.
Never Stop Learning – Be a Student of the Market
Be aware that you don’t and can’t know everything. The world is filled with information and there is always a way to improve. Unless you are winning 100% of the time, which you won’t, then you can always find a way to understand things more clearly. You shouldn’t use all the information that you find, but it doesn’t hurt to know that some people are using it.
Imagine you are playing a game of chess. You may know all the possible moves that your pieces can make, but you can be more effective if you understand what the other player is likely to do next. Learn more about what’s causing the market to move and you can be a much better trader.
Be Realistic
Traders invest hard-earned money into their trading accounts, all with a common goal of making money. A 20% return for the year is a fantastic return in a long-term investment account. The only reason to trade on a shorter-term basis is to capture profits without waiting for pullbacks in the market to recover.
It is very possible to achieve greater than a 20% return, especially in Forex when your money is leveraged on average 100:1 (50:1 in the US). By these numbers a 1% change in the value of a currency can provide up to a 100% gain on the cost of your position with that kind of leverage.
All of this sounds great on the upside, but can also work against you. The greatest attribute of the Forex is that it moves EVERY DAY on EVERY TRADING INSTRUMENT. You do not need to make a 100% gain in each trade that you make. Be conservative and stingy with your capital because after all, there will always be another opportunity to make money.
Set Profit Targets
What goes up must come down. Often caused by greed, the worst feeling you can have trading is turning a win into a loss. On the other side, being afraid to wait for your profit target to get hit can leave you dreaming about what could have been had you just stayed in the trade. Set a profit target on your trade and test your discipline waiting for it to get hit.
Trade with a Stop Loss
A stop loss is designed to protect you. Purpose of the stop loss is to protect you from losing more capital than you can afford on any one position. Sometimes it will get hit, and you will lose money in those circumstances, but you will live to trade another day.
You can’t control which direction the market will go. You can only anticipate where it MIGHT go next. So you can’t control direction, but you can control your risk. Trade with a stop loss and the market won’t get to control the size of your losses.
Be Disciplined
There is no reason to develop a trade plan if you don’t follow it. Every trader is different. Find something that works for you and your schedule and stick to it. If you don’t stick to your plan, you will never really know if it works and you may never figure out how to be successful in the long term.
If you are focusing on a strategy that disrupts everything in your personal life, you likely need to find an alternative strategy. Find something that works for you, execute consistently without emotion, and find your success.
Be Patient
Being a day trader doesn’t mean you open a new position every day, it simply means that you are open to shorter term opportunities. No matter the trade plan, there will be optimal conditions to execute a trade. If something seems like a good idea but doesn’t fit your trade plan, then pass on the trade. Knowing when to stay out of the market is equally valuable of a skill as knowing when to get in.