Many people who are just trying to trade in the financial markets do so because they believe that this is a profitable way to make quick money.
Some may get good results on a demo account. However, chances are that once they move from a demo account to real money trading, they will realize the hard truth that making consistent profits is not as easy as they initially thought. And that trading requires a fairly large amount of knowledge and experience.
This does not mean that you will not be able to become a profitable trader over time but rather dispels the myth that trading in the financial markets will allow you to make money easily and quickly. In today's article, I will offer you a point of view that will help you understand that profitable trading is possible, but first, you must follow some basic guidelines.
Learn the basics of global financial markets
If you are just starting out as a trader, the first thing you should do is invest your time and effort to learn the basics of trading. Without a doubt, you will have to learn how to read charts, understand indicators and understand the importance of money management and risk management. You also have to find an effective trading method for yourself.
You can start by researching the history of the stock, futures, and currency markets to choose the most suitable market for you to trade. You must understand and comprehend the structure of the market, as well as understand the balance of supply and demand that affect price movement.
You can also read some of the great thinkers of technical analysis, including R. N. Elliot, W. D. Gann, Richard Wyckoff, Charles Dow, and H. M. Gartley. These people were the pioneers of technical analysis. As well as other trading books that I recommend reading.
In addition, you should study some key economic indicators such as interest rates, unemployment, industrial production, gross domestic product, and housing market statistics.
Once you have a basic understanding of how the global market works, what drives price, and how the economy affects price fluctuations, you can target specific technical or fundamental approaches that best fit your own beliefs about the market.
Take a systematic approach to trade
When we see professional traders in the movies, we are often shown multiple monitors with a dozen different charts. Traders are constantly yelling at someone on the phone and making an endless amount of trades and then returning home in their Lamborghini. These vivid images create a strong, but in many ways misleading, the impression of what it means to be a trader.
However, if you've read any fact-based books about "real" traders, such as Jack D. Schwager's "Market Wizards" series, you know that the most successful traders behave very differently in real life. Although most of these top traders interviewed by Schwager had different approaches to trading, the common thread that gives them an advantage over most market participants is not their personalities, but their ability to stick to their trading strategy with maximum risk compliance.
Also, you don't have to be a genius to be a great trader. Yes, intelligence is important here, but the simple fact is that if you want to be a consistently profitable trader, you need to start with a systematic and disciplined approach to your trading.
Being a system trader does not necessarily mean that you always act like a robot. You can trade on your own and rely on your intuition and still be a system trader. By a systematic approach, I mean a holistic approach that includes:
- your psychology.
- Realistic risk-adjusted return expectations.
- Robust money management plan.
- A trading strategy that will give you a real statistical edge in ever-changing market conditions.
Treat trading like a business
To become a profitable trader, you need to have a trading system that will give you a real edge in the market. This system should not only determine when and where you enter and exit a trade but should also describe situations when it is better for you to stay out of the market.
Most beginner traders start out with a lot of enthusiasm, spending a lot of time reading various articles and constantly trying to master the art of profitable trading. However, they end up losing money because they either don't find a trading system that offers a real advantage in the market, or they actually find one that offers an advantage but they don't give it enough time to show its results. The last example most often says that this trading system, most likely, does not correspond to their personality or psychological type of personality.
Some people also make the mistake of misunderstanding their true trading goals. Many people are simply attracted to the gaming aspect and excitement, and they trade only for this. They take on a lot of risks and experience a lot of emotion when the price moves in their favor or against their position. Subconsciously, this excitement is what they really want from the market. In most cases, this ends badly for such gamblers.
Before you start trading, you need to understand that trading is a business. Even though you can make a significant profit by making a few clicks on the screen, you can also easily lose it. Successful trading in the long run requires a business mindset and a lack of excitement.
Basically, you need to take a step back and just think. Try to observe your internal thought process to understand what you are trying to achieve in the first place. If you truly believe that you are ready to treat trading like a business, then you can probably start trading profitably without any excitement or emotion.
Understanding various market conditions for stable profits
Most traders will agree with the saying "Buy low, sell high" or "Sell high, buy low". While common sense dictates that this is the only way to make a profit, let's take a closer look at this idea, which is actually a lot more complicated than it first appears.
If you have watched the price chart of any trading instrument, you would agree that the price can only do three things:
- The price may continue to rise and form an uptrend.
- The price may continue to decline and form a downtrend.
- The price can stay within a certain range.
Thus, there are two main types of strategies for profiting from the market. Either you can trade with the trend or trade in a consolidation.
On the chart, you can clearly identify two horizontal lines where the price finds support and resistance levels. You can be sure that the market is consolidating and is in a limited range. When you find such a market condition, it makes sense to buy near the support area and sell above the resistance area to make a profit.
In the figure, the price is clearly in an uptrend. Here we see a trend line.
During an uptrend, you basically have two ways to profit from the market:
- Buying at the low of an uptrend trendline.
- Buy at the maximum when the price breaks the resistance level.
When you try to buy low during an uptrend on a pullback, you are trading against the price action. Although you are trading the main trend, there is always the possibility that the price of the trend may end and the price will hit your stop loss, forcing you to exit the market with a loss.
When you wait for the price to break the resistance level, your chances of profit increase. In this case, you will not only be trading on the side of the trend, but the price momentum will also be on your side.
Likewise, during a downtrend, you should try to open a sell order near the downtrend line and also sell on a breakout below the support level.
No matter what trading strategy you follow, understanding the two different types of market conditions and choosing the right strategy will help you open your positions more efficiently.
Money management is an integral part of a stable trading system
As a trader, your main job is to be as competitive as possible in risk management. Successful trading in the financial markets in the long term comes down to having a positive expectation strategy and applying an effective risk management system. You must use a set of strict risk criteria for each trade that will allow your trading strategy to provide you with consistent profits over time.
There are several money management strategies, such as risking a fixed percentage of your capital on each trade, risking a fixed amount, and other more sophisticated methods of position sizing.
Regardless of which strategy you use, the point of a money management strategy is to provide a systematic way to determine the position size of each trade. Your money management strategy should be designed in such a way that in the end the outcome of a single trade is almost irrelevant and frees you from psychological attachment to your open positions.
Before you use the money management strategy that best suits your trading system, you need to determine two aspects of your trading strategy:
- The first aspect is the overall profit margin of your strategy.
- The second is the average reward-to-risk ratio of your trades.
Some trading strategies have a relatively low win rate, such as 30%, but the reward-to-risk ratio is quite high, such as 3 to 1 or higher.
On the other hand, there are trading strategies where your winnings remain at 90%. Which means you end up making a profit on most of your trades. The problem with these types of high win rate systems is that often the reward-to-risk ratio remains very low, much less than 1:1.
You can use different money management methods for these two types of trading systems. If your system has a high win rate but a low reward-to-risk ratio, you may be comfortable risking a slightly higher percentage of the funds in your deposit on each trade. In contrast, if your trading system has a low win rate and offers a high reward-to-risk ratio, you may want to be more careful about your risk per trade.
In any case, you should always try to limit your maximum drawdown as there is always a risk of getting a margin call.
How to trade profitably? Results
If you are feeling frustrated because you are not making consistent profits from your trading, you are not alone. Most successful traders have paid a high price to gain experience that has helped them further.
To become a successful trader, you have to spend a lot of time. You must thoroughly test and develop a trading system that offers the right balance in terms of win rate and reward-risk ratio. In this case, you need to take into account your temperament.
Be prepared to spend a lot of time analyzing your trading technique with various risk management techniques. Applying different parameters to your backtesting trading model can show how your trading strategy has performed under different market conditions in the past.
If you have a trading strategy that can turn a profit in a variety of market conditions, or at least help you stay out of the market and not lose money, then you need to apply a prudent money management approach.
Most traders never go that far. If you can take these basic steps, then you will outperform most traders and be able to trade successfully and profitably in the long run.