Getting Properly Educated to Trade

The Way Most New Traders Approach Learning

New traders simply have no idea of the challenge in front of them if they want to one day become successful at it. It all seems so simple at first glance, you buy something or you short something, and you close the trade later at a profit.

Sure, not all trades work, and even the best traders will lose money a third to a half of the time, but it does look pretty simple to do well at this, especially if you start watching charts and see things move in a fairly predictable manner.

Perhaps they have heard stories about how well some traders have done, and there is certainly a lot of money to be made at trading, but even the best traders have to learn to become good traders before they can become great.

Getting Properly Educated to TradeThis all takes time, and there is a lot to learn before you get to call yourself good, when your results are of the kind that you could even call yourself successful. Prior to getting there, you will simply have to pay the price as your illusions of ease become shattered.

There are two main goals that both need to be successfully reached when learning to trade. The first is to develop a sound enough trading plan that can be counted on to be successful over time, or rather, a skill set that can adapt to changing circumstances enough to remain successful.

The second goal is to develop enough fortitude and discipline to execute your successful trading plan properly, and this one is quite a bit more challenging than it may appear, and this is where so many traders fail. It’s a whole different matter trading on paper and executing trades with real money on the line, with real profit and loss on the screen, and this can cause one to react emotionally and make all sorts of mistakes.

While talent certainly matters here, with more talented traders doing better at it in the end, only a modest amount of talent is needed to become a good trader. One can construct fairly simple trading plans that tend to work overall and if one can put these simple plans into action, that’s going to take someone a long way toward success.

Trading Theory

The most basic of trading foundations is to develop at least a good idea of trading theory, beyond the most basic level that beginner trading books discuss. It’s not enough to just know how the basics of charting for instance, as one needs to be able to take this information and put it into practice.

One will not get the education they need from these books though, they won’t teach you that much about how to trade, for a number of reasons. Perhaps the author doesn’t really have that good of an understanding of techniques even though he or she may have a good understanding of technical analysis.

Perhaps the author is a good trader, although the ones that share their trading setups aren’t the top traders, as no one is going to share a setup that actually works that well. You actually have to come to that knowledge pretty much on your own, and what works well with one type of trade and one asset might not work that well for another, and things change as well.

There are a lot of different scenarios that traders are faced with, and the goal is to be flexible enough to adapt one’s approach to the situation, as there really isn’t a one size fits all strategy. This is the part that most traders don’t end up getting. As an example, they might think, well this or that indicator looks great, and it may do great in some situations, where the price is trending, but not so great in others, where things are fairly flat.

Gaining a good understanding of technical analysis overall though is very important and this is something few traders put enough effort into. If you don’t, then it will be harder to know what you need to fix. While there’s no substitute for learning from your mistakes, it is also important to have a good theoretical foundation to draw upon, to point you in the right directions when that’s needed.

Trading is simply playing the odds, taking information from charts and indicators and using them to predict future price action over given time periods. There is a fair bit to doing this even decently over time, and to do that, you need an understanding of what all this information means and how to use it to your advantage, which is what trading theory is essentially.

Keeping It Simple

The best piece of advice a trader can get when starting out, and one that even a lot of more experienced traders can benefit from, is the need to keep things simple. You don’t want to get too simple here, as trading is a complicated business, but it’s plenty complicated enough without making it even more complicated by way of your approach to it.

A big example of this would be relying on too many indicators, where you may have some telling you one thing and others telling you something else. This leads to what is called analysis paralysis, which stands in the way of making good decisions by excluding too many of them, making it even harder to decide.

The point of such things is to make things easier to decide actually, and this is why many skilled traders will use no more than two or three variables in trading. This is much more about quality than quantity, finding things that work the best and going with them.

Most indicators are of pretty dubious value actually, especially if one is seeking to trade something frequently, and maybe even be in on either the long or short side at all times. If an indicator is going to provide infrequent signals, and you use it, you could end up trading very little, which usually isn’t a good approach.

Looking to trade too many different securities is an even bigger problem, and the tendency here with less experienced traders and even many more experienced ones is to have way too large of a basket. Once again, quality here is the goal not quantity, and some traders trade a single asset full time and don’t even consider others.

This does not mean that this is the only way to trade, but looking to trade from among a big basket is the worst thing a newer trader should be shooting for. If one eventually becomes skilled enough, one may be able to trade a number of different things, but this should be worked up to.

If you want to trade stocks, it’s far better for many reasons to trade indexes, which are plenty volatile enough, more liquid, and often more predictable. These are highly desirable qualities and what traders need to be paying the most attention to.

The Learning Curve

There is a significant learning curve involved with every trader, even the most talented ones. Talent at this point is mere potential, and with the right effort, this potential can be realized, but it does not just manifest out of the gate.

There is no substitute for practical experience, and not having the success that you desire when starting out should be seen as a given. Some new traders get discouraged by this, but even more screw up by not having much of an idea where their trading is at and grossly overestimating their present ability.

By the time reality sets in more, they may give up, or they may bust their accounts, and both need to be avoided. If one realizes at the outset that this endeavor is going to take some real time and effort, and one should also practice sound risk management along the way, then one will stand a good chance to succeed.

Unless one already has a positive expectation, with at least a decently proven track record of success, risk needs to be kept to a strict minimum, to lower the costs of one’s practical education if for no other reason. Otherwise, one may just lose all the money in their account like most traders do and then be on the sidelines, perhaps with not a small amount of regret.

No one is going to hand you this on a silver platter, you aren’t going to just read a couple books or make a few trades or take a course or two or join a website and then be successful, you have to do quite a bit of work on your own to get there.

While you work your way toward this goal, it is crucial that you limit your losses, so that if and when you do figure it out enough, you will not have taken yourself out of the game due to enthusiasm or impatience  or frustration.

Getting Your Head Together

While new traders should start out with simulated trading, there is nothing like real money on the line, and meaningful money, to test a trader’s mettle. It is a lot more challenging to trade with meaningful money than people think, because it is not easy at all to ignore, and that’s exactly what you need to learn to do.

There’s only one right way to do this, and that’s to let the performance of the trade decide things. There are all sorts of ways to mess all this up though, from not entering trades because you are afraid of losing, to entering trades because you are too careless, to selling too soon, to selling too late.

Mistakes in trading are very often driven by emotions, and emotions have no place in trading. To the extent that they do, the trader will suffer. It takes a lot to be able to set your emotions aside and trade your plan, but this needs to be the ultimate goal.

Along the way, you’ll make plenty of mistakes, although as long as they haven’t cost you too much and you learn from them, you’re moving in the right direction.

Trading can be a rewarding profession, but make no mistake, it is a profession, and professions cannot be mastered overnight. It takes real time to get good at this, even among the most naturally gifted traders.

Provided one is prepared to make the proper effort and also has the right amount of dedication and desire to improve, becoming a good trader is certainly achievable.

Andrew Liu


Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.

Contact Andrew: [email protected]

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