Making Money as a Trader: An Introduction
Making money as a trader is one of the most difficult things to do, in my opinion. Traders often find it challenging to not only make money but also to retain it. In this article, I want to address some of the reasons traders are unprofitable and provide strategies to overcome these challenges. With that being said, let's dive into it.
The Importance of Proper Education and Real Trading Experience
The first main reason I believe traders have a difficult time making money is they have no idea what they're doing. You can't expect to dive into the markets, or anything in general, and instantly excel. It takes time and proper education to understand how the market works and how to execute real trades. Many traders mistakenly assume that reading articles or consuming information will magically make them proficient traders. Learning is only one part of the journey. Most of the knowledge and experience is gained through actual trading, in the midst of the battlefield, when real trades are executed. So, if you have a solid educational foundation, that's one piece of the puzzle. The second piece involves applying what you've learned by executing real trades, a step many traders overlook. They think that after mastering a certain strategy or understanding how to navigate the markets, they're ready to dive in. However, you should understand that having the education is just the beginning; the most challenging part is putting it into practice. Once you have the educational component covered and you're ready to apply your knowledge, here are some recommendations: 1. Start with paper trading: It's a valuable tool for getting a feel for the markets and the trading platform. However, remember that paper trading is not the same as real trading. It won't allow you to test your knowledge and emotions under real market conditions.2. Transition to real trading: Once you're comfortable with paper trading, take your strategies and apply them in real market situations. This is where you'll face the real challenges of trading. 3. Consider backtesting: If you're not yet ready to risk real money, you can use historical data to test your strategies and see how they would have performed in the past.
Developing a Real Edge in Trading
The next reason why many traders struggle to be profitable is that they lack a real edge.As a trader, you must possess a unique advantage in the markets. You need to understand the strategies you intend to trade and ensure they are thoroughly backtested, proving their effectiveness. Your role as a trader is to identify strategies that align with your personality and trading style. I often encounter traders who attempt to scalp or execute quick trades when their personality and temperament might not be suited for such a fast-paced approach. They often mimic strategies they've seen from others on platforms like YouTube, Instagram, or Twitter, thinking they can replicate the success of those traders. While learning from others is valuable, to truly excel, you should absorb insights from various traders, understand their methods, and then create your own playbook.Consider your personality and how you naturally approach things in life. Based on this self-awareness, determine which trading methods align best with you, and establish your edge or unique approach to the market. I frequently observe traders who place random trades without consistency in their trade ideas or execution. If your trading lacks consistency, you won't possess a genuine edge, making it challenging to scale your trading, progress to the next level, or achieve profitability.
The Pitfall of Strategy Hopping
Another common reason why many traders struggle to be profitable is strategy hopping. I've observed traders who possess a solid understanding of the markets, a clear edge, and a strategy that has been working well. However, when their strategy encounters a rough patch or stops working temporarily (which is normal in the markets), they tend to quickly abandon it in search of a new strategy. The issue with this approach is that traders often fail to recognize that a particular strategy will perform differently under various market conditions. Some market conditions may favor the strategy, while others might pose challenges. It's essential to understand that your trading strategy's effectiveness can be influenced by the prevailing market conditions. When you've meticulously outlined your strategies, established specific criteria, and thoroughly understood how they work, it's crucial to identify the types of market conditions under which these strategies are most viable. This could involve questions such as whether your strategy thrives in all market conditions, or if it performs better in trending markets, ranging markets, volatile markets, or during gap-up and gap-down days. Instead of hastily abandoning a strategy when it faces challenges, take the time to understand why it might not be working as expected. Consider whether the issue lies with your execution, if market conditions have changed, or if the strategy itself was never robust to begin with. In trading, it's essential to adapt and refine your strategies as needed. Don't jump ship at the first sign of trouble; instead, analyze and adapt to the evolving market conditions. By doing so, you can avoid falling into the trap of constantly switching strategies and give your existing ones the opportunity to shine once more.
Lack of Discipline and Patience
Lack of discipline and impatience are common issues among traders.I frequently encounter traders who possess a sound strategy, effective risk management, and technical knowledge, yet struggle with personal discipline. They fail to follow their trading plan and lack the patience required for trades to develop or setups to materialize. These individuals tend to rush into trades in their eagerness to make quick profits. This is often more of a personal challenge than a trading problem, as personal issues tend to spill into trading.I firmly believe that a person cannot be disciplined in trading without being disciplined in their personal life, and vice versa. You either naturally possess discipline or you've developed it through self-improvement. For instance, consider a scenario in your personal life where you commit to going to the gym regularly but fail to follow through. What do you think will happen when you apply a similar lack of discipline to your trading? The same issues arise; you won't adhere to your plan or listen to yourself. If you struggle with discipline or patience in your trading, start by cultivating these qualities in your personal life. Commit to being disciplined in all aspects of your life. If you promise to go to the gym at a specific time, make it a consistent daily habit. As you build discipline in your personal life, you'll notice it gradually transferring to your trading.Trading demands an exceptionally high level of discipline and patience, primarily because it often involves waiting for the right setups. Trading isn't about constantly placing trades; it's about waiting for opportunities, recognizing them, and executing effectively. That's our primary role as traders—to identify opportunities and act on them, rather than randomly placing trades with no consistency or edge.If you find it challenging to maintain discipline or patience, focus on developing these qualities outside of your trading activities. You'll see them naturally seep into your trading practices.
Managing Your Time Horizon
Tight time horizons can be detrimental to traders.I often observe traders who set unrealistic time frames for themselves, such as aiming to achieve profitability within one month, two months, or three months of entering the market. This self-imposed pressure can create unnecessary stress, making trading more challenging than it needs to be.Why make something that shouldn't be excessively difficult even harder for ourselves? If you're starting out or facing difficulties in trading, consider shifting your perspective. Instead of saying, "I must be profitable within a specific time frame," try this approach: "I'll give myself a reasonable period, like two years, to fully immerse in the market and focus on self-improvement." During this time, your primary goal should not be making money or achieving profitability. Instead, concentrate on becoming a better trader by focusing on:1. Identifying an edge: Understand what strategies and methods work for you. 2. Learning about the markets: Gain as much knowledge about the markets as possible. 3. Understanding yourself: Analyze how you react to losing and winning days, handle stop losses, and manage emotions like FOMO (Fear of Missing Out).Your aim in the first year should be to comprehend these aspects, rather than focusing solely on financial gains. Setting the goal of making a specific amount of money within a fixed time frame can create unnecessary pressure, leading traders to take unwise trades or force trades that don't align with their strategy and neglect proper trade tracking.
Setting Realistic Expectations
Having unrealistic expectations can be detrimental to your trading journey. This ties back to what I mentioned earlier about setting a tight time horizon. Unrealistic expectations often set the bar unreasonably high and can lead to unnecessary stress in your trading. While setting ambitious goals is not necessarily a bad thing, it's essential to manage your expectations, especially when you're just starting out. For instance, setting a goal to make $100,000 or $200,000 in your first year can create undue pressure and stress. As traders, we don't need to add more stress to our lives. Instead of focusing solely on monetary goals, consider directing your expectations and goal setting towards identifying problems and achieving small wins.Small wins can include identifying which trading strategy is most profitable for you, pinpointing the factors leading to significant losses, recognizing and addressing mental blocks or psychological issues in your trading, and developing systems to tackle these problems. Shift your focus away from your profit and loss statement (P&L) in the short term because your profits may not reflect your progress immediately. If you start as a trader today and, in six months, you achieve these small wins, imagine how much you'll have learned, how well you'll understand yourself and the market, and how much you'll have improved in execution. Over another six months, as you compound these small wins, you'll make substantial progress. Contrast this with setting unrealistic financial goals like making $100,000 in six months or a million dollars in a year, which can unnecessarily complicate your trading journey.Simplify your approach, focus on small wins, and abandon strict time horizons and unrealistic expectations. Concentrate on the trading process, and over the long term, you'll increase your likelihood of success.
The Art of Losing: Embracing Losses in Trading
One critical aspect of successful trading is knowing how to handle losses. While it might sound counterintuitive, it's essential for traders to be adept at dealing with losses. However, many traders who struggle with profitability often have difficulty coping with losses. This can be attributed to various factors, such as ego, emotional responses, or a lack of understanding of how to handle setbacks. To clarify, let's step back for a moment. You might be wondering, "Why should I be okay with losing? Why should I become skilled at losing?" The reason is simple: in trading, you will be wrong more often than you are right. The trades where you do win, provided you have proper risk management in place, are the ones that will compound and generate the most profit. Unfortunately, I've observed traders who, after having good days or weeks, fall into a frenzy when they face losses. They become erratic, struggle to control their emotions, and fail to manage their losses effectively. One of our primary responsibilities as traders is to safeguard against excessive downside risk.You must understand how much you are willing to lose on a trade and what constitutes an acceptable loss in proportion to your account size. When you find yourself on the losing side, assess the situation from two perspectives: 1. Good Loss: Did you follow your game plan? Was the trade based on a well-thought-out strategy with a reasonable probability of success? Did you adhere to your stop-loss and risk management plan, losing the amount you had planned to lose? 2. Bad Loss: Did you take a random trade without a clear edge? Did you disregard your stop-loss, risk management plan, or game plan, resulting in a loss that exceeded your planned limits?Identifying the difference between a good and bad loss is crucial in evaluating your trading performance. This is where keeping a trading journal and tracking your trades becomes invaluable, as it allows you to distinguish between the two. As traders, you need to learn not only when to accept losses but also how to handle them. Since losses are an inevitable part of trading, understanding the distinction between a good and bad loss will provide you with peace of mind. Trading involves taking calculated risks, and when losses occur, you must accept them as long as the probability and outcome were in your favor.To succeed in trading, you must master the art of losing, manage risk effectively, and maintain emotional composure during losing periods. Avoid the temptation to react impulsively when faced with losses, as some traders have one good month only to erase their gains in a single day or week. Ensure that you can navigate and manage your losses wisely.
Understanding Your Trading Psychology
Understanding your trading psychology is paramount. Every trader is unique, with different thought processes, operating methods, and personalities. As we venture into trading, we encounter various challenges, and our reactions to these challenges differ.Our primary task as traders is to identify our mental blocks and personal psychological challenges. For instance, consider traders who struggle with following their stop-loss. Their difficulty often arises from a fear of losing money or a reluctance to admit they were wrong. Some traders, on the other hand, find it easy to follow their stop-loss but struggle with patience, interfering with the natural development of their trades. To excel in trading, you must pinpoint the psychological issues that arise in your trading and devise a systematic approach to address them. It's not enough to merely identify these problems; you need to build a system to tackle them effectively. Ensure that you're consistently addressing these issues throughout your trading career and understanding how you respond to each one. I've witnessed traders whose trading was severely impacted by mental and psychological issues that spilled over into their trading activities. Therefore, comprehending, identifying, and rectifying trading psychology problems is of utmost importance.Until you address these aspects, true success in trading remains elusive. As previously mentioned, tracking your trades, thoughts, and emotions can be a valuable tool in gaining insights into what works and what doesn't, providing you with a deeper understanding of yourself and your trading dynamics.
Tracking and Analyzing Your Trades
Many traders enter the market without understanding their data, lacking insights into what they excel at and what doesn't work for them.I firmly advocate treating trading as a business. In any business, one crucial aspect is tracking and analyzing data, understanding what's going well and what isn't. Unfortunately, many traders neglect this fundamental practice when they start trading. They skip keeping a journal and analyzing their trades, opting to randomly enter positions. While it may be easy to do so, this approach won't help you evolve as a trader. To grow and improve, you must comprehend all the metrics related to your trading. Identify the areas where you struggle the most. In my opinion, the key is to track every single trade you take. Record details such as your stop-loss, the R multiple on the trade, reasons for entering and exiting the trade, and the outcomes of your trading days. I can provide a separate article on the importance of tracking and journaling trades if you're interested; just let me know in the comments below. To stay on track, make sure you're diligently tracking and analyzing your trades, identifying your flaws, understanding what works and what doesn't, monitoring your position sizing, and assessing various aspects. This practice is crucial for a trader to comprehend what's causing losses, where profits are coming from, whether you're exiting trades prematurely, and whether your stop-loss strategy is effective.Does your stop loss make sense? For instance, if a trade hits your stop loss, does it continue to move lower or reverse from that point? The only way to gain insights into these questions is by tracking, journaling, and analyzing your trades.
The Importance of Effective Risk Management
One of the most significant reasons why traders struggle to be profitable, or fail to remain profitable, is inadequate risk management. As traders, our primary responsibility is to manage risk, as it is the only aspect of trading we have control over. We cannot control the outcome of individual trades or predict whether a trade will move up or down. What we can control is the extent of our risk exposure when we are wrong. This involves determining the amount of capital we are willing to risk in relation to our account size. In essence, it's about aligning your position size with the level of risk you are comfortable with if the trade goes against you. Many traders make the mistake of immediately focusing on the potential profit when entering a trade. They think about making $2,000 or $4,000, which is not a healthy approach. Instead, I approach every trade by considering the potential loss. I ask myself, "If I take this trade and it goes against me, am I okay with losing $500 or $5,000?" No one is naturally comfortable with losing money, but in trading, losses are an inherent part of the process. Therefore, you must become adept at accepting losses. When I take a trade, I mentally prepare myself to accept the predetermined loss amount. If I am comfortable with that potential loss and my risk management plan aligns with it, I take the trade. Contrastingly, many traders make the mistake of taking a trade with a significant profit potential while ignoring the potential loss. They might think, "I'm risking $5,000, but I'm going to make $20,000, so the loss doesn't matter." This mindset can be detrimental because if the trade turns into a loss, and they weren't mentally prepared for it, it can lead to poor decision-making and emotional distress. My approach is different. Before taking any trade, I establish a mental stop-loss level. I determine the point at which I would be wrong, and based on my position size, I know the maximum amount I could lose. When I enter a trade, my primary focus is on the potential downside because that's the aspect of the trade I can control. I cannot control whether the trade moves up or down, but I can control my risk. By shifting your mindset to focus on your potential loss on every trade, you can make more informed trading decisions and better cope with losses. These are some of the reasons traders struggle with profitability or trading in general. If you face similar challenges or have difficulty being profitable, share your experiences in the comments below. I want to thank you for reading this article, and I look forward to bringing you more insights in the future. Until next time!