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How to Be a Trader (Part 1): Expectations
01/20/2016 6:00 am EST
Are you interested in becoming a trader? In this three-part series, Markus Heitkoetter will discuss how to start by setting realistic goals and how to avoid the "millions in minutes" mindset that holds most new traders back.
According to Google, "How to be a trader" is one of the most active search terms. It seems that these days, many people are interested, but what does it take to become a trader; what are the steps? In this three-part article series, you will learn how to be a trader.
The Mindset of a Trader
Many people are intrigued by the idea of "making millions in minutes" while working from home or anywhere they want. There's no commute to work, no boss yelling at you, no deadlines, no annoying coworkers, no cubicles, no demanding customers, and the list goes on.
Often people dream of living in an exotic location, trading for a few hours in the morning and then enjoying life, and although this might be reality for some traders, the vast majority has a different reality.
They put in a lot of time and money and spend countless hours in front of their computers (often more than they did while they still had a "real" job), yet their account is not growing. In fact, it is said that the majority of traders lose money.
If you want to become a trader, then you must be willing to invest the time, money, and effort to learn how.
You won't become a trader overnight. In the beginning, trading can be grueling and frustrating. Your results will not match your efforts, and this is why many traders give up.
However, if you do follow a structured approach and understand that trading is not another "get rich quick" scheme, there's a chance that you might achieve your goals.
Do You Really Want to Be a Trader?
Trading is a business. It's a profession, and it takes time to learn how to trade. Anybody who tells you differently is a liar. Sorry for being harsh, but it's the truth.
You can't just buy a "magic" system that automatically puts money into your bank account overnight. It doesn't exist!
Realistically, it can take you several weeks or even months before you have your first profitable trade. And, in the beginning, you might even lose some money no matter how well you prepare because when trading, there's always the risk of loss.
However, here is an approach that can increase your chances of making it as a trader.
Step 1: Setting Realistic Goals
Here's the problem: many aspiring traders have unrealistic goals. They start with a $5,000 account and expect to make $5,000 in their first month of trading. No wonder many traders fail.
Focus on small but consistent profits!
Trading is a function of risk and reward. The more you risk, the higher the profit potential. Or, in trader language, the larger the stop loss, the higher you can set your profit target.
Let me give you an example: a good reward/risk ratio is 1.5:1. This means that you are willing to risk $100 trying to make $150. If you start with a $5,000 account, your stop loss of $100 would be exactly 2% of your account. I'm sure you already heard about the "2% risk rule," which is widely used and recommended by many trading experts.
Now let's say you are right every other trade; i.e., your trading system has a winning percentage of 50%. This means that in the long run, you can expect as many winning trades as losing ones.
For our example, let's say you place ten trades: five of them are winning trades and five of them are losing trades.
You would make $750 on your winning trades (5 x $150) and lose $500 on your losing trades (5 x $100). Your gross profit after ten trades would be $250.
You now need to deduct your commissions, which should be between $50 and $70 for ten trades, depending on your broker and the markets you trade.
Therefore, your net profit after ten trades would be around $180-$200.
Next, consider how many trading signals your system produces. If you get ten trading signals per week, then you can expect a weekly return of $180-$200 on a $5,000 account.That is a phenomenal result!
Think about it: with a simple trading strategy like this, you could expect $720-$800 per month on a $5,000 account.That's a whopping 14%-16% every month!
Now, keep in mind that there's also the possibility of losing money, so let's now talk about losses.
If you had ten losing trades in a row, then you would lose $1,000 since you are risking $100 per trade. That's 20% of your account.ouch!
But honestly, if you manage to have ten losing trades in a row, you should stop trading immediately because the chances of getting ten losses in a row when trading a strategy with an expected winning percentage of 50% is less than 0.1%!
Before you even start trading, you need to know what to expect from trading. Have realistic expectations and understand the risks of trading.
Set small goals, and don't shoot for the stars. Try to make $100 per week on a trading account of $5,000. That would be $400 per month, or 8% based on your capital.
You might not achieve your weekly goal every week. There might be some weeks when you make less, or you might even lose some money. But in the long run, you should be ahead and see your account grow. And, with proper risk and money management, you should be able to control your risk while growing your account.
The key is to find a trading strategy with a winning percentage of 50% while achieving a reward-to-risk ratio of 1.5:1.
Read more tomorrow in Part 2.
By Markus Heitkoetter, founder and CEO, Rockwell Trading