Perhaps you have heard the statistics before. Nine out of every ten people who enter the stock markets as an active trader fails, but why is that? In my opinion, based on years of experience of teaching traders, the number one reason why traders fail: they lack the tools they need to succeed. And no, I’m not talking about having the right trading computer, broker, or even trading capital. Sure, these things are important; however, you could have the best trading computer available, the best broker and a million dollars of trading capital, but that does not mean squat!
The good news is this: the tools you need to succeed are accessible to everyone.
Let me put this in context. Pretend that I was a contractor and I showed up at your door to build you a new house. I have no builders license, no tools, no blueprints, heck I even have a blind fold on. Now, are you going to hire me build you a new house? Of course not! I don’t have any of the right tools to do the job. I would be guaranteed to fail and you would be a fool to hire me.
Yet, I see it all the time in the world of trading. People conduct themselves like the contractor I used in the above example and expect to get “good results” (aka, have people “hire” them to build the house, which we have already determined is completely foolish).
So what are these tools that you need as a trader to be successful? Well they are simple. I like to call it the trader’s tool belt. In that belt you find things like: education, experience, charts, vision, and risk management systems. Let’s look at each one of these tools.
One of the most important aspects of any career is knowledge. Learning how to build a house is not something that is accomplished overnight. The same principle is true for trading. You cannot just jump into the market and expect to know it all. You need training and education in order to gain that knowledge, the knowledge to be a successful and consistent trader.
Once you have that knowledge and training you are now book smart. Book smart is a great step in the right direction, but do you know how to apply that knowledge to the real world of trading? Doctors attend many years of school to gain the knowledge they need, but even once they enter the real world they don’t immediately start performing brain surgery. No, they must go through a residency period and learn how to apply what they have learned to the real world. In trading our “residency” is accomplished through what is known as paper trading. I want to keep things honest and not sugar coat anything, so I’ll tell you right now, paper trading is by no means fun or glamorous. Because of this truth, many people skip over it because they are so anxious to get into the real world of trading. However, practicing your knowledge in the market without any risk of losing money is crucial to your long term success.
Have you ever watched a documentary or movie regarding the financial markets? If so, pay attention to the computer monitors in the background. You are going to see technical charts. When the big money on Wall Street uses charts, that tells me all I need to know about their importance. Why is the big money on Wall Street using them? They allow you a way to form trade plans around what you believe a stock is going to do. In order to successfully trade a stock, option, currency, commodity, etc., you need to be able to form a trade plan. Charts help in forming trade plans by helping us as traders to identify patterns and any types of trends the price may be experiencing. You need to become comfortable with charts before risking any capital.
Vision / Sight
Just like you would never let someone build you a house or perform brain surgery on you while being blind folded, you should NEVER trade blind folded. What do I mean by this? Well you need to be able to see what is going on in the market, this is where the use of Level 2’s comes in. With Level 2’s you will be able to see the orders being placed in the market before they happen. This gives you that extra edge and vision into the market. I am amazed how many people out there are trading without this crucial tool that should be in all traders’ toolbelt.
Risk Management System
Despite what some “gurus” or late night infomercial people may claim, no one is going to win in the market 100% of the time. Because of this we need to be able to manage risk. This is by far the most important tool that any trader could have. People blindly make money all the time; however, the true test comes in holding onto those gains. You need to have a plan and system in place in order to control your trades and manage your risk. The last thing you want (and it unfortunately happens all the time) is to allow a losing trade to turn into a catastrophe and destroy your trading account.
Like I said in the intro, these tools are accessible to everyone. Some of them are even free, you just have to be willing to put in the time and effort to use and master them. Start with your education, learn the market, and then learn how to apply that education through the use of paper trading with charts and level 2’s before ever entering the market with capital on the line. Finally, I will end with this since it is the most important. If you are not focused on risk management and implementing those systems, you will fail as a trader… this is a fact.