Why do so many people want to become traders?
People trade stocks, precious metals, commodities and Forex because they believe trading is a holy grail and can make their dreams come true. They think, or rather they hope that they can make money very quickly and can then change their lives for the better. Unfortunately, hope is not a good ingredient of a successful trading career.
I have met traders from various cultural and economic backgrounds and they all seem to have the same ultimate goal. They want to change their lives with the profit that they hope to make in trading. Some of them want to quit their job, some want to buy a nice car, a house or go for a long vacation. What most people ultimately want to achieve through a successful trading career is freedom. Being able to wake up in the morning and do whatever they want or go wherever they want. People feel that life has put them on a track where they don’t want to be. They feel constrained with daily rules and obligations that they have to deal with. It starts from the childhood when mom or dad tells you what you can or cannot do and it also passes through the adulthood as the society needs to have rules, norms and constraints to exist.
What fascinates people in trading is that the space and time they encounter in trading has neither rules, nor contraints. Nobody tells you how to trade, what to trade, when to trade. In fact the trading platform you have in front of your eyes is sort of a whole new universe, where the trader himself can create the rules and obide to them if he or she wants to. It is quite obivous that a lot of people find this free world to be quite fascinating and there are hundreds of millions of people globally who are a part of this world, every day.
The most common mistakes that new traders make
Although everyone is completely free to choose how to trade, the single biggest mistake of any trader is actually to have no rules. If you drive through a city center with a speed of 200 km/h then you will get into an accident because there are traffic lights, speed limits, pedestrians. You might be able to get through once, but statistically you will ultimately fail. Similarly to traffic rules, a successful trading career is also built on the basis of some rules which you have to follow.
The biggest participants of the Forex market are commercial banks, central banks, corporations and large institutional traders. All of them have rules on how, what and when they trade. They don’t flip a coin to take a chance, they don’t place trades without having carefully thought over the full cycle of the trade – open and close. It is therefore a neccessity for any trader who wants to become successful to have trading rules and a discipline to follow them.
Most traders don’t have trading rules – they just watch the charts and then open trades on the basis of some gut feeling. Most of the time the trades are positioned against the trend because the average trader thinks he is smarter than the market. They also have no stop loss orders, because getting the stop loss triggered would mean that the trader made a wrong decision and nobody wants to admit failure. Remember that majority of the traders like to project on their friends and family the image of a successful trader.
Having been in the industry for a very long time, I can tell you that depending on the broker and the quality of execution, around 60-70% of all day trades placed by clients of Forex, stock or futures brokers end with profit. Yes, from millions of trades placed by millions of traders globally around two thirds end with profit. But here is the kicker. If we look at the pips lost or earned from each trade, then on average traders lose 2 to 2.5 times more pips on loss making trades compared to profitable trades. The reason is that 85-90% of all trades placed on the market by retail traders have no stop loss orders attached and therefore the losses are always bigger than profits – around 2 to 2.5 times. The reason why traders don’t place stop loss orders or even close their orders manually when losses start to mount is that by doing it, they would first admit their failure and second, they would be one extra step away from their dream.
The most important trading rules to follow
- Have a trading plan or strategy and try to find your edge in the market
- Limit your losses by placing stop loss orders
- Maximize your profits by letting your profitable trades to run
- Focus on a limited number of trading instruments and learn everything about them
My personal suggestion for any new trader is to first trade on a Demo account for at least 6 months. Once you succeed on a Demo account, open a small Live trading account to feel how the real money losses and profits affect you psychologically and whether you are able to stick to your trading rules. Trade on a small Live account for 6 months and increase your deposit only after you feel comfortable and get the desired trading results. If you cannot become consistently profitable in your trading career within 2-3 years then you should admit that you are not a good trader and you should actually quit trading.
You should keep in mind that depending on the market conditions and patterns, whether the market is trending or flat, only up to 5-10% of the day traders become very successful. By trading first on a risk-free Demo account you can actually get a taste whether you have the knowledge, discipline and skills to become a successful trader.
Choosing the right broker is crucial for success
I have chosen Tickmill because it is the broker that wants traders to succeed. This company was built specifically for the most demanding traders who need the very best spreads, low commission and extremely fast execution, and I am one of them. I know that the company’s management originates from the trading industry, so they know how difficult it actually is to consistently make money in this business and they are doing all they can to make traders’ lives easier. When I started trading Forex some 5 – 6 years ago, the industry average spread on EUR/USD was 3 pips. Imagine where we are now with Tickmill’s average EUR/USD spread of 0.3 pips.
In my next post I will write about the most successful Forex traders. I want to give you an understanding of how they are different from others and what everybody can learn from them.