10 Things A New Trader Should Know From the Start

10 Things A New Trader Should Know From the Start

Many new traders entering the trading game can’t get the right answers because they aren’t asking themselves the right questions. Much of the success traders experience is attributable to how well they know themselves. This insight for you will come from the quality of the questions you ask, and how honest you are willing to be with yourself. Only after you honestly answer the following 10 questions, will you have enough self-awareness to be successful.  

  1. What markets will you trade? Futures, options, equities, or forex? You must fully understand the markets you choose.
  2. Do you have enough money to trade successfully? A bank of $25,000 will enable a trader to avoid the pattern-day-trader rule, and help to ensure broker commissions do not deplete trading capital. If starting with smaller capital, it is better to trade over a longer period to avoid excessive commissions. To comfortably trade for a living, $250,000 to $500,000 in trading capital is realistic, depending on your expected standard of living.
  3. What kind of annual return do you anticipate? A consistent 12%-20% annual return will put you in league with some of the best money managers in the world.
  4. What timeframe will you be trading? Will you be a day trader trading intra-day charts and going home flat with no positions each night? A swing trader buying lows, holding for a day, a week, perhaps longer and then selling higher? Or will you be a trend follower, holding positions as long as the trend is up over a period of months?
  5. How much are you willing to lose on a trade if you are wrong? Position sizing and placing stops to ensure no single loss is more than 1% of your total trading capital will keep your trading capital safe over the long term.
  6. What will be your entry parameters? You need set ups and entry signals that are proven to be profitable through price and chart studies.
  7. How will you exit a winning trade to lock in profits? Money is only made in the exit. Trailing stops and profit targets enable you to exit a winning trade while the money is still yours to take home.
  8. What is your maximum risk exposure? How many open positions will you have at any one time? How much will be at risk in each one of those trades?
  9. What is the most draw down in capital you are willing to accept before you abandon your system? Generally a 25% draw down is proof that your system is not viable for real trading. A 50% drawdown in trading capital is virtually a ruined account because it will take a 100% return to get back to even.
  10. What is your edge over other traders in the market? If you can’t answer this question, you need to find an advantage before you place your next trade.

Your success as a trader will depend on whether you ask yourself how you plan on mitigating losses to your trading capital, rather than how you will get rich quickly. Don’t get caught up in trading results; focus on controlling your mindset in the present. By focusing on the process that ultimately leads to success rather than obsessing over the results you achieve in the learning phase, you will become a self-aware, disciplined trader. If you ask the right questions, and then go seek the right answers, the only barrier between you and success is time.