In previous articles, you learned about a demo account, how to work with that account and even how to earn without risk. Today, we’re going to take a look at how a novice trader can quickly and safely work his/her way from the first trade to stable profit in the financial markets, avoid pitfalls and protect himself/herself from any losses.
1. Two Dangerous Extremes
2. What Is the Best Way to Trade If You Are a Newbie
3. What Does a Newbie Trader Need to Know About Money Management
4. Trading Psychology: The Third Pillar of Trading Success
5. Trading and Life: How to Manage Your Work
6. Mistakes Made by Newbie Traders
Two Dangerous Extremes
Being on the way towards stable profit in the financial markets, novice traders face two extremes:
1. First: you can learn much and for a long time, but you still can’t switch to live trading.
2. Second: you start off not having any knowledge.
Both ways lead to failure. By the way, it’s the traders who lost funds due to their ignorance of trading principles build up a negative image for the financial markets. You can’t earn without knowledge! The process of acquiring knowledge can’t be separated from practice either. Therefore, newbie traders should both learn and practice. Let’s consider and answer the questions that beginners often get puzzled by.
What Is the Best Way to Trade If You Are a Newbie
Forex brokers now provide a wide range of financial instruments within one trading platform. These include currency pairs, stock CFDs, futures, cryptocurrencies, commodities (oil, gold, silver, etc.). It’s easy for a beginner to get lost in that world of variety.
Learn the features of each market and then decide accordingly.
- The foreign exchange market is a perfect fit for those who are willing to trade at any time of the day. It has high volatility, which allows earning faster if you have a correct approach. It’s better for a beginner to choose the main currency pairs (with the US dollar) for a start, as they are clearer and less volatile. Cross rates are highly volatile, while exotic pairs offer low liquidity. This means that it’s better to postpone trading these instruments until you gain wider experience in the market.
- The stock market enables you to make good money, but the movements are more restrained in this case because one trading session — unlike the foreign exchange market — doesn’t last around the clock. It’s suitable for those who want to trade calmly and get stable profits.
- The commodity market (oil and gold are the most popular among forex traders) is suitable for diversifying your trading portfolio. However, due to the high volatility of gold, it’s better to work in this area only if you have a large trading account.
- The cryptocurrency market can be chosen for diversification purposes after you learn the market as a whole and master the technical analysis of cryptocurrencies.
What Does a Newbie Trader Need to Know About Money Management
As you know, trading in the financial markets is a high risk area. However, such risk is completely manageable. And if you know how to do it, you can make a stable income.
In addition to a profitable trading strategy, a trader needs to have an understandable money management system and solid risk management. Your account’s safety depends on these elements.
Here are the key elements of a good money management system:
1. Stop loss. It should be set correctly, according to the market requirements and your trading strategy. It will help you reduce your risk if your forecast turns out to be wrong or is out of date.
2. Risk/reward ratio in each trading position. Trading strategies usually set that ratio at a level of 1:3 and higher. The minimum allowed ratio needs to be 1:2, only then the trade makes sense.
3. Trade entry volume. Along with stop loss, it determines what amount or percentage of your trading account you put at risk in each trade.
4. Risk per position. Based on the expected value of your trading strategy, it’s necessary to decide what percentage will be the maximum risk in each trade. The smaller value equals the safer deal.
5. Risk Manager. This software solution will prevent you from violating your own money and risk management rules and will also help reduce the human factor impact.
Learn about advantages of Risk Manager here.
Today, we can see the traders working in the market for several years and continuing not to know or ignore these rules, as they consider calculating risks to be something unnecessary and burdensome. Any failure to observe these rules leads to the fact that your profits are reduced, while the deposit is dwindling. A trader finds himself/herself in an emotional breakdown and constantly violates the rules.
It’s surprising that successive failures and setbacks, which aren’t analyzed at all, can result in family troubles and a loss of confidence. Without having a clear risk management, there is no way a trader can reach stable profits.
Trading Psychology: The Third Pillar of Trading Success
Controlling your own emotions is an important factor newbie novice traders should pay attention to when reading books. Trading is an amazing area. All your habits, behavior patterns, strengths and weaknesses are immediately reflected in the trading account and yield results in monetary terms. This is how you either earn or lose.
Newbie traders who face a whirlwind of emotions when trading should know the following thing, “You are not alone.” Most traders experience the same feelings, and those who have been making money in this sector for a while now have learned how to turn them into their advantage. Fortunately, they are ready to share the tips.
The basic emotions that almost all market players face are fear and greed. They are about excitement, inability to open a position at the right time or close an unprofitable position and violation of money management rules.
You can find many decent articles on how to control emotions in the course of trading. However, the first thing you need to do is learn to keep track of your own psychology and how it affects the way you trade. To that end, you should describe all your feelings that accompany each trade in your trading journal. Your next step would typically involve an error analysis.
Trading and Life: How to Manage Your Work
Let’s say you’ve decided to start making money with trading. Motivating photos showing traders who sit under a palm tree, holding a cocktail and spending an hour a day to check profits in the trading account are clearly not the way the start of a trading career looks like. At the very beginning - and overtime as well -, you will need to have a properly arranged working day.
1. Set aside some time that you will devote to trading on weekdays.
2. Don’t mix it with other activities: dinner, watching TV shows, spending an evening with your family, etc. Trading requires the utmost concentration.
3. If you are a beginner, you can use the study plan given in this article, divide the stages in terms of time and move to your first profit systematically.
4. Before you start trading, do a market analysis every day.
5. Print out the trading plan and have it in front of you at all times. Open a position by using your trading plan only. 6. Keep a trading journal, write down all your trades in it and do an error analysis.
7. Set aside some time to learn. The fastest way to work your way from a beginner to a consistently profitable trader is to have a mentor you can learn from.
Mistakes Made by Newbie Traders
To sum it up, let’s mention the most common mistakes that most newbie traders make. The below mistakes will definitely prevent you from going from zero to hero quickly and efficiently, so try to avoid them.
- Lifelong student: you learn a lot but don’t practice.
- Chaotic absorption of information: if you learn something, you should clearly understand why you need it and how you can apply it.
- Impulsive trades and trading without any trading plan.
- No money management system.
- Trading volume picked randomly or on a whim. You should clearly understand what lot you will use to open a position and what percentage of the trading account you put at risk. The amount should be acceptable and reasonable.
- You attempt to remember deals and circumstances under which they are made. Don’t be lazy and don’t overload your memory. Keep the Trader’s Diary.
- Uncoordinated working days: trades opened on the go and at odd times will ruin your deposit!
As you can see, the first step you need to take to success is to learn how to get to the top. You can do so by using free resources (find their list in our articles).
Press the button and start to learn
Or you can use a course taken by thousands of traders. It brings you real results, as it contains all the important topics on money making in the financial markets. Don’t separate learning from practice.
Stay tuned for an analysis of the most common mistakes made by traders. In other words, we’re going to discuss why traders are sending money in their trading accounts down the drain.