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Practice Makes Perfect

February 21, 2012 by   Filed under Trade Like A Pro

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So you want to learn how to trade, you have done some research, joined all the right newsletters and are ready to roll. Now what? Do you open an account and jump right in? Well, you could but before you do that I have a couple suggestions for you to consider that will probably save you a lot of pain and suffering.

The first thing I would recommend is putting together a trading plan. This isn’t a 100 page document or anything so don’t panic it’s more of a written set of rules that you promise yourself you will stick to.

  • What types of stocks are you going to buy?
  • Are there certain price ranges you are going to stick to?
  • If day trading, are you specializing in breakouts or pullbacks?
  • What time frame on the charts are you using?
  • How long do you want to hold your positions?
  • What are your favorite entry set ups?
  • How much money will you trade per stock?
  • Have you identified support and resistance levels prior to entering a trade?
  • Have you identified where you will automatically sell the stock if it falls below that price?
  • Do you have a profit target price?
  • Is there a cap on the amount of trades you’ll make in a day?
  • How much capital are you going to start with?
  • How will you decide to add more to the account or take more risk per trade?

These are just a couple ideas you want to think about before trading. There are many more, but you get the picture. Think about them and put together a plan as a safety net or a road map to the next level. Trading without a plan leads to undisciplined thinking and actions that could cost you dearly.

The next step is paper trading.

Paper trading is simulated trading in which you practice making trades without using real money.

There are a few ways you can go about getting started. Most online brokers offer practice accounts and there are also several websites and/ or programs you can use. Practicing with your online broker’s platform is often a good idea because it is the platform you will be using when you start trading with real money. This familiarity will help you avoid hitting the wrong buttons and screaming at your computer when you go live and find yourself in the heat of the battle.

After you have a practice account set up, determine how you will measure success before trading with real money. Set up a goal you will need to achieve before going live.  Here are some examples; four winning trades in a row, 6 out of 10 winning days, 1 profitable month, or $1,000 fake dollars earned. If you can’t do it on paper first, chances are you can’t do it with real money.

Once you have passed your paper trading test the next step is to fund your account.  Start SMALL, I can’t stress this enough. The objective here is to start an official track record. Paper trading, like any other form of practice does a good job of preparing you for battle, but its a lot different when the real bullets are flying.  Now that you are really trading you will have to deal with real fills which are much tougher to receive at ideal prices than those paper fills you were making, not to mention all the order entry mistakes you made and swept under the rug will be real now.  So it’s best to start out small as you get the hang of the real thing.

Putting real money on the line also brings the psychological issues to the forefront. Whether it’s 50 dollars or 50 thousand dollars, ego will start to creep into the picture and all the rules you learned tend to go right out the window. You will all of a sudden think you posses a crystal ball and you are so good that you don’t need to wait for the proper entry signals or use mental stops anymore because you are now a master trader. This happens to EVERYONE (yes even you).

At this point every new trader will get bloody enough for one of two things to happen.

1) They get frustrated and quit, complaining that the market is rigged, the system doesn’t work, or any one of the hundreds of excuses that can be used to not accept personal responsibility,

or

2) They finally submit and start following the rules and strategies that were laid out for them realizing that discipline is the key to successful trading.

If you take road number two use the same test you did while paper trading. Once you pass, increase your risk in the market and continue to do so until you are trading with the capital you intended to when you set up your trading plan. If you begin losing, back up, trade with less capital until you master the skills to move back up.

If you follow this simple plan, it is impossible to lose a significant amount of money while you are learning and that is the whole objective for any new trader.

 

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