We won’t sugarcoat it because from own experiences and from our work with hundreds of traders we know that trading is very hard and challenging. No wonder that the analysis of brokerage data confirmed that 40% of traders quit after 1 month and only 7% are still active after 5 years.1
But why is it so hard and what makes traders struggle so much? We have talked to loads of traders throughout our program and there is a common theme among all of them to be seen. The reason why so many traders give up too early and don’t see the results they are looking for, can be boiled down to 9 principles. The following points will help you understand what it takes to survive your first year(s) as a trader and also how to pave the way for a great trading future.
#1 Avoid unrealistic expectations
The first question traders always ask is “how long does it take to become profitable?” and this is a very wrong question to ask – when starting out. Yes, it is possible to become a profitable trader within a few years but it is much more likely that you will lose (several) trading accounts before that. Thus, you should ask yourself “how can I not lose all my money?”
Although it does not sound good and it might be a downer for some of you, it is important to realize that you won’t make a lot any money in your first year(s) as a trader. If you can trade around break-even and not lose any money, you are already better than 99% of all traders and are off to a great start.
When starting out, you have to focus on not losing all your money so that you can keep trading and learning. Starting with wrong expectations quickly leads to frustrations, bad trading, over leveraging and finally quitting. Make sure to avoid that at all costs.
#2 Focus on the right things
So if you are not going to make any money, what are you going to do that first year?! The first steps of a trader consist of getting familiar with the market and the market dynamics, you should look for a decent mentor (more on that later) and start studying as much as you can.
You should pick ONE method or approach and start putting all your focus on that one approach. Over the course of your trading career you will most likely go through several systems and try out different things, which is normal, but you should stay away from frequent “system hopping” and changing your approach every month.
It’s important to develop the right mindset and stay away from gambling and the get-rich-quick promises. Don’t focus on making money, focus on establishing a good routine and learn as much as you can about ONE method.
#3 Should you demo trade?
Demo trading has its place and is certainly recommended for traders. Spending your first few months on demo and/or a backtesting software is necessary to familiarize yourself with the way the trading mechanics and market dynamics work.
Staying too long on demo, though, can have a negative effect. Demo trading eliminates the emotional aspect of trading and it does not teach you how to handle the real money pressure. Setting up a small (SMALL!) live trading account and getting your feet wet is a great way to practice. Just be careful that you don’t start gambling when your trading account is too small.
#4 Build a playbook
We have briefly touched on system hopping and it’s important to avoid this terrible behavior and mindset. You should AT LEAST give your trading method 6 – 9 months before you start changing it completely.
Also, really try to understand the tools and concepts you are using. Most traders use indicators or trading methods and don’t fully understand what they are doing. If you want to become a professional, profitable, full-time trader, you have to REALLY learn your craft and dig deep.
Get a playbook and take screenshots of similar setups, take notes and study the same setups relentlessly. Over time, you’ll pick up similarities and patterns and so build your knowledge. Trading, especially when using technical analysis, is a game of pattern recognition.
Most traders look for consistent results first. This is not how it works. First, you need to have a consistent approach, then you can have consistent results. Don’t change your trading method all the time!
#6 Treat trading like a business
This is such an abused phrase because people throw it around without really understanding what it means. For us, it means that you need to take trading seriously. Here is what it takes:
- Write trading plans and plan your trading week ahead, analyzing your markets
- Create a checklist that you consult before entering a trade. A checklist contains your trading rules
- Ener all your trades in your trading journal
- Review ALL your trades once you are done to get a deep understanding of your strengths and weaknesses
#7 Finding a mentor
Mentors are great, but they can also be the complete opposite. There are a lot of charlatans out there which make promises about the easy and fast money. Claims about doubling your account year after year, trading 2 hours per day and making “a killing” or other too-good-to-be-true claims are always that – simply not true.
What do you need a mentor for?
Almost all profitable traders trade a system they have somehow developed themselves – at least to some degree. A trading system is something very personal and it has to fit your personality and your character. Thus, do not look for a mentor who promises the “best returns”, but someone who can teach you about trading in general. Someone who builds your mindset, talks about trading psychology, the long-term concept of trading, helps you avoid common problems and prepares you for your journey.
Don’t confuse a mentor for a signal provider or just someone you buy a system from, but a person you can reach out to and who actively helps you become a better trader.
Besides having a mentor, there are a few more things you can do to improve. There are fantastic trading books out there, written by the best traders of all times. You can pick their brains for a few bucks and learn from their mistakes. Here is our top 4 recommended reading list for new traders:
- Peter Brandt – Diary of a Professional Commodity Trader: Lessons from 21 Weeks of Real Trading
- Dr. Brett Steenbarger – Trading Psychology 2.0: From Best Practices to Best Processes
- Steve Burns – New Trader, Rich Trader 2: Good Trades, Bad Trades
- Marty Schwartz – Pit Bull: Lessons from Wall Street’s Champion Day Trader
Obviously, recording your trades in a trading journal is also a must if you want to improve and get better. If you are not analyzing your past trades and trading behavior, how can you improve?
#8 Protecting emotional capital
Many new traders burn out easily because they don’t see the results they were after (unrealistic expectations) or lose so much money that they cannot rev
Staying in the game long enough to make it is the real challenge for newer traders. Burning through account after account will also cost you heaps of emotional capital and eventually you will simply give up.
It is so important to understand that this is a long-term thing and you have to make sure to survive long enough to learn as much as you can.
And don’t forget to enjoy the process!
1Barber, Lee, Odean (2010): Do Day Traders Rationally Learn About Their Ability?