The list below highlights the five most important points or stages that every successful trader or investor needs to go through. I came up with this list after several years of failure and varying degrees of success in the markets. The list is also, in a way, a distillation of the numerous discussions and conversations I have had with fellow traders and market practitioners over the years.
- STUDY THE MARKETS
Make sure you know what you are doing, BEFORE entering the markets. Start from the very fundamentals. Ask yourself questions like: Why does this particular market exist exist?, what is its purpose?, who are the key market participants in this market? etc. By asking yourself these basic questions (and answering them), you will gain a deep understanding of why markets behave the way they do. A comprehensive grasp/understanding of this basic knowledge is required before moving to the next stage.
- CREATE YOUR OWN "THEORIES"
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If you wish to be a successful trader, build on the basic knowledge in step1, and add your own observations about price movements and behaviour. If on the other hand, you want to be an investor, build on the basic knowledge in step1 and learn how to read (and interpret) company and industry reports and form a market opinion based on your analysis.
- PAPER TRADE
This is where you get to test the "theories" you created in step/stage 2. Paper trading is a bit like shadow boxing. It certainly makes you fit and strong, but it does not prepare you for the adrenalin rush (fear?) of someone standing in the opposite corner of the ring, waiting to "punch your lights out". Paper trading has its uses, but it is only the first step along the path in becoming a successful trader or investor. You should only move to the next stage if you have managed to paper trade successfully. Under no circumstances should you enter the markets with a trading strategy that is not profitable (after transaction costs).
- START SMALL
Once you have managed to get a good system going - (steps 1,2 & 3). You need to open a broker account. You would typically need a few thousand dollars (or local currency equivalent) to open a broker account. Spread betting may be the way to go (if legal in your country of residence), but there are other risks associated with spread betting that I won't go into here.
Forex broker accounts can typically be opened with much smaller capital than I indicated above. However, there is a rather large element of leverage involved, and there is the small (but non-zero), probability of unlimited losses - if the market gaps through your stops for example. So generally, leveraged accounts are best avoided when you are only just starting out. As I covered in an earlier blogpost on share market trading for beginners, the "safest" instrument for beginners would be to stock indices.
- LEARN AND ADJUST
Learn from your mistakes, constantly see what is working and what is not working, and adjust your strategies and/or trading mentality/psychology accordingly. No one EVER goes beyond this stage. Even the most accomplished traders and investors are at this stage (and will remain at this stage for the rest of their lives).
This is because of the psychological/emotional aspects of trading. Becoming a truly successful trader or investor has an almost spiritual or "Zen" like side to it, as it involves overcoming oneself, and learning to control/manage fear/greed without getting overly attached to a particular outcome.
There is always room for improvement - and the market WILL "put on notice" - anyone who chooses to ignore this rule. As the old saying goes, there are bold new traders and there are old traders, but there are no old bold traders!
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