Education Trading Basics
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Losses are inevitable when it comes to any endeavour in the financial markets. In fact, sometimes losses are even part of a smart strategy, for example with hedging, where one position loses against another.
Becoming a consistently profitable trader is a question of time as well as strategy. It is ill-advised to consider yourself a profitable trader after one or even ten winning trades.
Profitability comes over a succession of trades. How long that is depends on your time frame and strategy.
It can take years of study and then more years of trading experience to reach profitability. It requires a good mix of knowledge, smarts, experience, intuition, and the ability to evolve.
If you want to dive deeper into what it takes to reach trading success, then read on. We’ll go through our concept of what trading success is. But remember, it will be different for everyone—trading is an individual journey.
What Is Trading Success?
Trading success can be understood as when a trader reaches consistent profitability from trading in the financial markets. For many this will mean earning an income from trading, but it can also be used to manage and increase savings.
Trading success means that the trader has learned to minimize risks and execute their strategies effectively. Although there are no definite steps in which trading success can be achieved, some good signs you are on the right path include:
- Developing An Edge
An edge in trading can be understood as a method or approach to trading that gives a trader advantage over other traders in the financial market.
To develop this edge, a trader needs to study the market and observe which approach maximizes their chance of making profits. Often, as more and more traders use the same approach, any edge becomes smaller, eventually ceasing to exist.
- Having A Trading Plan
A trading plan includes a strategy for entering and exiting trades, rules for managing risk as well as calculating position sizing.
If a trader has the necessary discipline, a trading plan ensures that only a specific strategy is followed, which in turn minimizes the risk undertaken and allows the edge to make itself appear over time.
- Being Consistent
Consistency is the key to becoming a successful trader. A trader must execute strategies and regularly participate in the financial market to gain knowledge and become efficient.
Being consistent means the trader isn’t swayed by emotions or frenzied and temporary market fads, and can stick to their trading plan.
- Accepting Losses
A trader must understand that the financial market is volatile, and with each trade, there are risks involved.
Losses are ultimately unavoidable, and the trader must be able to accept losses and move forward by learning what caused those losses and how to prevent or at least reduce their frequency or magnitude in the future.
How To Reach Profitability
Profitability is the ultimate goal of every trader in the financial market. Thus, it is crucial to understand how to reach profitability. The two most important steps to reach profitability are:
- Maintain A Healthy Risk/Reward Ratio
The Risk/Reward ratio encapsulates the profit that a trader can make by buying or selling a financial security and the risk associated with this trade.
This ratio helps traders analyze whether the risks that need to be undertaken are worth the potential profits on offer. What is defined as a good risk-reward ratio will depend on the strategy.
- Manage Risks
Every trader in the financial market understands that dealing with financial securities incorporates certain risks. These risks, when managed efficiently, can be minimized, resulting in little or fewer. Managing risks allows the trader to trade freely, giving them a piece of mind and reducing the risk of blowup.
There are many different ways to manage risk. To read about some of those, check out our article How to Measure Risk in Trading.
Wrapping up
Becoming a profitable trader is easy to fantasize about, but achieving this goal requires dedication, consistency, time and not to mention money.
The path to becoming a profitable trader will be slightly different for everyone. With that in mind, it is also essential to profit from the financial markets, a trader needs volatility, and even with the proper knowledge, strategy, and execution, a trader will still incur losses.
In some ways, profitable trading is more about risk management than another else. Therefore, the goal of a serious trader should be how to manage risk, letting the profits take care of themselves.
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