You probably already know that just because you’re a trader doesn’t mean you’re going to become a billionaire overnight. Likewise, trading isn’t luck. Trading is a step-by-step process that will allow you to make consistent profits as a disciplined trader. And every process needs a system.
Trading always teaches you something, regardless of whether you win or lose—it doesn’t matter if you’re an absolute beginner or a seasoned pro. No matter how advanced you are in your trading skills, you need to have clearly defined goals, strategies, methodologies, and risk tolerances, as well as an optimal state of mind and time for trading.
Why? Because a well thought-out strategy that matches your own goals and personality will save you from emotional collapse when trades go south. It saves you from making rash decisions. It saves you from shooting from the hip. It covers you when you’re tired or not focused. It covers you when temptation of that big return is dangled in front of you and you get excited about a potential big win. Say it with me: Systems Save.
If you’ve set your own rules before sitting down to trade, it will help keep your trading account funded and therefore alive, instead of blowing it on a revenge trade or unsustainable risk taking.
Think of the preparation for trading like you would think about hiking. You need to know where to start. You need to know where the hiking trails are. You need to know which trails are steeper and more difficult than others, where bears are, and when you want to arrive. You’ll need a map and GPS on your cell, and paper maps for back-up if reception is bad.
The same preparations apply to trading. In trading, you need to know what you want to achieve, when you want to do it, where to do it, and how to do it.
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And the best way to go from point A to point B in trading is to sit down and sort out all your ‘what and where’ details before you start trading.
What do I want out of trading?
First ask yourself, “What do I want from this?” Then, write down your answer. Keep a dedicated journal. That’s the first step to creating a system, and writing it down will help you get started with an action plan.
Where do I want to be 1,2,…10 years from now?
Then, think of where you want to go, or where you want to be a few months and years from now. When you set your ultimate goal (for example, “I want to earn $100,000 in the next 24 months.”), look into your finances and at your personal risk tolerance. That’s your starting point on the trading hiking trail. How much money can you invest in creating a trading account? How much will you risk per trade? Never trade with money that you cannot afford to lose. That’s why you need a preplanned system: set out a specific amount of money you can put into trading without losing your shirt.
When do I want to trade? When do I have time?
Then, ask yourself when you want to trade, or when you have the time to trade. Are you planning on being a full-time trader? Are you working 9 to 5 and want a break from the routine? Can you afford to be a full-time trader? When is your best time for being focused and emotion-free? Some people stay up late and are more productive later in the day; others are able to put in their best performance earlier in the day. What’s your preference? Think of it and plan before you start trading, because if you’re trading in a time slot when you are exhausted or distracted, chances are that your judgment may not be as clear as at the time of day you feel your best.
What steps do I need to take to reach my goal?
Then, you’ll need to have the ‘how’ on your trading hiking trail. You can’t jump to the mountain peak right away. In the beginning, smaller trades and smaller profits (especially if you start with a small account) are profits all the same. How is your trading account? How is your risk tolerance? Plan for this, and start drafting a trading plan. How well do you know the markets and the stocks? How much time do you need to spend researching? Are you a day trader? Do you love penny stocks? First find the answers to these questions and then set out on writing down your trading plan.
Before you start trading for real, think, research, and decide: what to trade, how to trade (long/short), how much to trade, when to trade, and when to stop. Set entry and exit rules, and set stop losses. And, of course, follow those rules. With a system to follow, you can save yourself a lot of frustration and stress. Without a plan, you risk putting more emotions into trades, overtrade, or revenge trade to make up for losses. Managing emotions is as important as your trading strategy.
Review and Rethink Your System
Then, at the end of the day (or week), analyze your past trades. Have you stuck to your plan? If you did, why did you take a loss? Do you need to work more on research, or on emotion management? If so, do it. Be prepared for next week, or the next trade.
There will always be losses—you know that no trader has ever had a 100% winning record. But you can always aim higher, with the help of your own map to guide you through the trail. The advantage of having such a map is to give you the direction to follow toward your summit. You may have to tweak your emotional or trading or strategy map, because markets are not a constant.
The constant is you making the rules. Make sure you create a system before you set out on the trading hiking trail.
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