Getting Properly Experienced to Trade

Newer traders invariably enter into trading with an overblown sense of optimism about how easy trading might be and how easy it will be to become successful at it. In spite of how many people struggle at trading, it is indeed possible to become a successful trader and even a very successful trader, but this does require both effort and experience to achieve.

It’s not that it isn’t possible for a new trader to experience a lot of success right out of the gate, with no real preparation, but this is extremely unlikely. Even if one were a savant who had extraordinary abilities to understand the probabilities involved in trading, and very quickly achieve the insights that it usually takes traders years to obtain, if they do at all, such a plan still needs to be executed properly, and one may turn a great plan into bad results by not being able to do so.

Getting Properly Experienced to TradeIt is not that successful trading is all that difficult, and it is actually pretty easy to obtain results that are much better than a buy and hold approach, mostly because a buy and hold approach is such a terrible plan. To do so, you do have to manage to learn the right lessons so that you can first find such an approach, one that works consistently, and then have the discipline to put it into practice.

Of these two challenges, the second one, being able to put your plan into practice, tends to be the more challenging one, and some believe that that this is as much as 90% of the battle. It is a major component of trading mastery at the very least, of at least equal importance as managing the data from a theoretical perspective.

The execution part is the practical side of the equation, where one must then seek to execute the plan under the pressures of the market, and failing to do so properly is the reason why so many traders may do well with paper trading but wilt when real money is in play.

Establishing Yourself With Paper Trading

The first thing to get a hold of is managing trading probabilities properly, and this does not require real money in play, and one can at least get a good foundation of this paper trading, trading on a simulator that matches market conditions exactly other than the trades being placed on a demo account.

Many brokers and trading platforms provide this service, as a way to drive business, and trading in demo mode first can be vital in the learning process. It is not that one cannot gain this experience trading a real account, but the idea behind paper trading is to allow the new trader to learn without exposing themselves to excessive losses.

Brokers do tend to be eager to have you move to trading with real money of course, and some will pester you to do so right out of the gate, where perhaps you’ve only been doing this for a week but they want you to think this is plenty long enough, too long perhaps, and it’s time to move on to the real thing.

The time a new trader should be spending gaining experience with demo trading does vary, and some pick it up more quickly than others, but a reasonable standard would be at the point that the trader is confident that they have mastered their trading technique well enough to have a good expectation of profit.

In a single week, you will not even have much of an idea of whether you have accomplished this, and it typically takes quite a bit longer this that to become proficient enough. A lot of this is determined by how frequently you are trading, as the more trades you place, the more experience you gain in selecting entries and exits, which is a large part of the battle.

There is also the experience that is gained in sticking to your plan, and demo traders should always do their best to treat the demo money as real money, and this is crucial in fact. Otherwise, one may establish bad habits and the experience may even become a detrimental one.

The period one should spend on paper trading also depends on the risk exposure that trading with real money instead would present. If one is looking to trade instruments that trading with real money would particularly expose them to significant risk, due to the minimum trade sizes required, then one requires more confidence.

Avoiding Commissions While One Gains Experience

If one is looking to trade contracts for difference based trading, including forex, where one can virtually trade as small of a position as one likes, then the transition to real money can be made much quicker. We still would want to start with a demo account here until we at least had a decent idea about what we are doing, to have a decent chance to be profitable, but given the much lower risk involved in trading very small amounts, this allows us to transition more quickly.

If we’re paying a fixed rate or a commission per trade though, even though our amounts may be small, these trading costs can eat up our account pretty easily if we don’t know enough about what we are doing, so to manage this risk, we do need to be making sure that we steer clear of these costs until we are ready, when we are reasonably certain we can manage them.

You can trade without these trading costs, with forex trading for instance, or contracts for difference that don’t involve stocks. Contracts for difference trading isn’t permitted in every country though, the U.S. for example, but Americans can still cut their teeth trading forex, which operates the same way.

The idea here is that you can take a position that only involves risking a few dollars, such as risking $10 or even a dollar on a trade, which would not be possible if you cannot place a trade this small or if it costs you more than this just to place the trade.

On the other hand, risking very small amounts to look to gain very small amounts doesn’t really have many advantages over demo trading, because these amounts aren’t going to have much of an impact upon either the account of the trader nor their emotions, and it’s the effect on their emotions that we need to be most concerned about.

Moving To Significant Trading Sizes

Once one is ready to trade with meaningful trade sizes, ones that matter, and only when one is ready, we can look to make the leap. Ideally, this should be a gradual process, where one goes from paper trading to very small trade sizes and increases them as one gets better and becomes more confident.

The reason most traders fail is that they fail to pay enough attention to this, jumping in too soon and usually way too soon. The money that they put up for this tends to be quite significant to them and by the time they have a chance to gain enough experience, their accounts are often decimated.

In order to be trading with significant sizes, sizes that can both excite you and hurt you, you need to have both of the two main elements of trading significantly mastered, which is having a good plan and being able to execute it.

There is only one way to achieve the mastery of putting your plan into action properly, and that’s to achieve this self-mastery through experience. You can read plenty of books on this but unless you’ve proven that you can handle the pressure yourself you haven’t learned the mental side of trading yet.

The tendency to second guess yourself is something that many traders grapple with, and the decisions that you made before you placed the trade may have been good ones, but under the pressure of battle you may be tempted to either exit too soon or not soon enough, leaving yourself with tactics that lose money over time instead of making money over time.

The Big Picture

Another big challenge is understanding that a good trading plan means it is good over the long run, over a great number of trades, and this doesn’t mean that things are going wrong when you experience a number of losing trades in a row along the way.

There is a strong tendency for less experienced traders to over adjust, where they keep changing things based upon the results of particular trades and end up all over the place, where their strategies are constantly evolving but not into what works in the long run.

We need to always evaluate performance based upon the probabilities, based upon what will work over many trades and not just one or just a few. This takes quite a bit of experience to master, and is another of the big reasons why it takes several years to become a good trader generally.

This is not to say that it takes this long to become profitable, and to achieve a profit level that clearly beats the market so to speak, but becoming a good trader is an evolutionary process that does not happen overnight.

Traders that have become very successful will tell you that this takes a lot longer than newer traders can imagine, and the goal in the first year or two should be to stay out of trouble, to look to learn and gain experience while staying in the game and not getting too hurt.

If one is particularly gifted, one can become a good trader in the first year, but there is so much to learn, and this requires more than anything that one learn more quickly than is typical.

Trading is a profession and one that requires a great deal of skill. There are some practitioners that are much more skilled than others, like in other professions, but it takes real time to become skilled and experienced enough to be at least good, to be making good money at it and not losing money.

Learning any profession does take time though, and the trading profession isn’t any different, and you aren’t just going to be walking into it and making a killing without paying your dues. This usually means losing a lot of money but does not have to, provided one is sufficiently prepared and manages their risk properly.

Limiting your losses while you gain the proper education and experience is the real key here, and the difference between busting your account and giving up and staying in the game and giving yourself the chance to get there in time.

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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