Trading in financial markets can be an exciting and potentially lucrative endeavor. However, achieving consistent profitability requires a systematic approach and a commitment to continuous learning. When I wrote this article I wanted to include every significant factor that went into being a profitable trader so there is a lot of information. This article will serve to outline the essential steps to becoming a profitable trader that include :
- Education and Skill Development
- Define Your Trading Goals and Strategy
- Trade in real time and masters your emotions
- Employ Risk Management Practices
- Sizing up the account and procuring more funding
- Consistency and Continuous Personal Growth
Lets get you started.
Step 1: Education and Skill Development
Begin by acquiring a solid understanding of the financial markets, trading principles, and various strategies. Learning through books, online courses, seminars, and reputable resources will work. You will also have to understand technical analysis [link] risk management, and trading psychology. Once you have a basic understanding of these concepts it will be time to develop your skills by utilizing demo accounts and simulated trading environments to test out your ideas.
Although this is the first step it will most likely be the longest taking anywhere from months to years to understand how the market moves and how you can trade it. Learning the skill of trading alongside a methodology that works for you will require you to understand your trading personality [link].
Step 2: Define Your Trading Goals and Strategy
After observing the market and learning about different methods of analysis, it is time to start building your first trading system. You will have to highlight your trading objectives and create a trading strategy that aligns with your goals and risk tolerance. It is important to make sure to set realistic trading objectives in terms of % returns or risk adjusted returns so your trading blueprint is realistic. You will also need to know the asset classes you want to trade, the timeframes you prefer, and the types of technical analysis you will employ.
Once you have identified all these factors you can start rigorously backtesting [link] your trading results in excel and journal of the charts to better see how you would trade the situation in real time. If you are reading the tape [link] you should also record your screen and watch it again. Once backtesting is complete and you are confident in the results you can begin forward testing your trade procedure in real time on a Demo account. A well-defined trading system should seek to ensure you have positive expectancy in the market.
Step 3: Trade in real time and masters your emotions
Once a trading system is successfully backtested and forward tested on a demo account , it is time to start trading live. Opening a real account with a small amount of money or doing a trading combine [link] will be a great way to trade with skin in the game. A quick disclaimer, live trading is much more difficult than demo trading even if the price moves are the same. A lot of traders report being profitable on demo and then switching to live and suffering losses. The reason for this is because the emotions at play with real money will always be painful until you learn to trust your trading system. It will take practice and proven backtested results before you trust your system enough to be completely emotionally unaffected by market volatility.
Step 4: Employ Risk Management Practices
Once a trading methodology has been successfully tested, proper risk management must be employed. Accordingly, determine your risk tolerance and establish guidelines for position sizing. If you have a small account, it is best to not risk more than 1% of total account equity per trade if you are conservative and 3% if you are aggressive. For trading combine challenges, I would recommend not risking more than a quarter of your account drawdown per day.
It is also important to reduce exposure risk when dealing with drawdowns. Even proficient traders can reach a period of drawdown where the system employed produces unprofitable results. When this happens it is best to reduce the trading system size until it starts performing better again. Personally, I review my back tested results to see what is the likelihood of losing a certain number of trades in a row. I know from my own results that when I lose more than 5 trades in a row it is time to slow down and analyze why I am taking so many losses as the odds of a 5 loss drawdown happening for me are less then 10%.
Every system will be different so it is important to know what a normal drawdown period looks like [link] and how to manage it.
Step 5: Sizing up the account and procuring more funding
A successful trader will either find a size that’s comfortable and trade it indefinitely or make adjustments to their trading size over time. Sizing up your account will hold psychological challenges just like live trading for the first time but it can be overcome with practice. For sizing up there are several strategies [link] that can be employed to make the process smoother.
Another alternative to scaling the trading account is to seek external funds either through investors or prop firms. Lots of prop firms and investors will be very willing to work with a high performing trader.
Step 6 : Consistency and Continuous Personal Growth
The key to profitable trading is finding an approach that works and maintaining the discipline to execute the plan. If over time some trading strategies do not perform optimally, it may be necessary to adjust the strategies and back test them. There will be times when strategies stop working all together and that they should be retired.
In summary, learn from your mistakes, adapt your strategies when necessary, and focus on long-term profitability.
By Regularly reviewing your trading performance and assessing the effectiveness of your strategies, you will ensure long term profitability. Do this by keeping a trading journal [link] to track your trades, analyze your pitfalls and strengths, and identify areas for improvement. Use this feedback to refine your approach and make adjustments to stay profitable.
Final Note
Remember, success in trading is a multi year endeavor, and patience and persistence are key. Continually seek improvement, adapt to changing market conditions, and remain positive to maintain high performance. With time and experience, you can develop the skills and mindset needed to thrive as a profitable trader.
Let me know if there are any other questions you have about trading. Leave a comment and join our email list for more articles like this.
Happy trading, and as always manage your risk!
Andrew Akl
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