My advice to new Traders

There are many things I wish I knew when I first started trading, but what advice I give to new traders depends on the recipient. If I can be certain that the recipient of the advice is willing to accept what you say and run with it, I would tell them about the importance of the right mindset (or psychology) for trading, and talk about how to prepare themselves for the mental rigours of trading.

The problem here is that if you tell someone who is starting to trade that their mindset or psychology is going to be the most important part of their success (and not their entry signal for example), most would just laugh at you and think you are joking.

Here is the irony of trading – the primary reason why people trade is to make money. Yet, it is the money that often causes people to make all the mistakes and not make money, because they focus too much on it.

For example, the most important thing you can when trading is to cut your losses, yet deep down people don’t want to because it appears to go against the primary reason why you are trading – to make money. By cutting the loss, you are denying yourself the opportunity to make back the money in that trade.

The other thing with money is that I don’t think there are many other things in life that affect our emotions as much as money does. So when we are trading and our own money is on the line, it is difficult to not get too emotional with our decisions yet emotions often lead us to making poor trading decisions.

Trading is decision making. Often you are faced with several alternatives of what you can decide to do, however generally it boils down to two options. You either decide with what you feel like doing or you decide with what you know has to be done to trade well. Most people select the former whereas those who are successful with their trading, ignore what they feel like doing and do what has to be done to ensure overall long term success. This is a key separator between successful traders and the rest.

Aside from the psychology response, I would tell a beginner that trading isn’t as easy as you probably think it is. Many people think that trading is easy money, as I did early on – it is probably the hardest easy money there is.

If a new trader can appreciate right from the start that trading isn’t as easy as they think it is, they will most likely approach it with a more committed effort and be prepared for the challenges that trading presents.

With the benefit of experience, there are so many things I wish I knew when I first started that I now just accept and take as ‘the way it is’. I could have also answered with:

* be humble – you are not going to get every trade right

* be committed – trading is not easy and any half hearted attempts will not get you anywhere

* educate yourself – there is so much to learn and whilst you can learn from actually trading, you can save yourself a lot of money and stress by learning from someone else who has come before you

* take it slowly/be patient – trading success is not going to happen overnight. For most people, this is a life long endeavour so does it really matter if it takes you a few years to start trading profitably

* keep it simple – people have a tendency to overcomplicate matters and develop intricate and complex solutions to problems. When we accept that trading is not easy, we think only a complex solution (trading plan) will work. In trading, simple does work. It is also makes it much easier for us to follow the plan when it is simple.

* be realistic – having high expectations of yourself is a good thing however, unrealistic expectations is not. Many traders when presented with the wonderful opportunities that the market offers can be very easily led to setting unrealistic goals for their trading. This can be devastating. It is vital to set yourself goals with your trading but it is equally vital to ensure that those goals are measurable, and realistic.

* focus on the right things - don’t focus too much on your entry signal, as most people do. Keep it simple and then move onto the more important areas like position sizing, setting exits and preparing your mind for successful, disciplined trading.

* whatever you do, protect your capital – it goes without saying that if you have no money left, you can’t make money. This is an important issue because any new trader is not focused on protecting their money, they are focused solely on making money!

Article by Stuart McPhee