We live in a world where we are faced with risks each day. Driving for example has many inherent risks. To mitigate these risks, we have established road rules, speed limits, and driver training standards to qualify for a license. Vehicles have advanced safety standards including airbags, automated braking, electronic stability control, and traction control to name a few. These are all examples of risk management to keep the driver, passengers, and others safe on the road. It is not 100% perfect but does prevent untold fatalities each year.
There are similar safety standards to manage risk in just about anything, electronics, aircraft, buildings, and food production all have established safety standards and protocols. In trading risk management is the sole responsibility of the trader. There are no mandatory safety checks or protection mechanisms built-in by the broker to protect the traders' funds. Here in the United States, I can open a forex account in less than 10 minutes, put all my life savings on the line and go trade with no formal training. That's pretty dangerous if you want to hang onto your money and people do it every day to watch their equity disappear.
To help fellow traders preserve their capital I have listed a few principles or safety features that have helped me over the years and I believe it can help you to.
1. Invest in Quality Trading Education
Remember the time you saw a flying video on YouTube and then drove to the nearest airport, rented a Cessna to try it yourself with no instructor. Or the time you saw a video of someone enjoying the thrill of scuba diving and then rented the gear to go off on your first solo dive. In both scenarios, the average person would never attempt those activities without formal training, yet thousands of new traders do something just as crazy, which is trade the markets without any formal training. They watch trading videos on the internet, open a live trading account the next day, and gamble their money away. This is madness. The other scenario is they play it safe with a Demo account and then muster up the courage to trade the market. The result is almost always a disaster, a new trader may have luck for a short time only to be schooled by the market shortly thereafter.
The safest option to preserve one's capital is to enroll in a professional trading program. A good trading program will provide the structure, mentorship, and education to help you succeed as a trader. I watched countless trading videos on youtube and after a year I was nowhere. I then signed up for a professional trading program which changed everything for me, it was still a year before I became consistently profitable, but I have since been able to achieve things I never dreamt of. Trading education is key to managing your Risk don't try and figure it out on your own.
2. The Pitfalls of Demo accounts
It's interesting how many of the brokers will provide a demo account to new traders with about 100k of paper money. This is intentional to lure them into the fantasy of being able to make thousands as they trade large accounts. Don't fall for it. Demo accounts are great for newbies who want to get a feel for the markest and tools used to pull a profit. Think about this though, does being able to take off and land a Jet on Microsoft Flight Simulator qualify you to fly the real thing with your friends and family on board? No, it doesn't, and likewise profitably trading a demo account does not qualify or prepare you to trade a live account.
The psychology behind trading a demo account and a live account is different very different. Although the strategy will be identical, your subconscious mind knows you are not trading real money, this prevents emotions from being triggered, you are typically less conservative in your trading and can blow the account without consequence. You cannot sufficiently develop the psychological and emotional skills need to be profitable on a demo account.
The best approach would be to test out some ideas on a trading simulator which you can find on Ninja Trader or MT4, which will allow you to test different scenarios in pre-recorded market conditions that you could practice over and over again. Referring back to a flying analogy, airline pilots practice different drills in a simulator that they could not replicate or safely replicate in normal flying conditions. Likewise, traders can master adverse trading conditions by replicating the scenarios over and over again in a trading simulator that you cannot do on a demo account.
3. Begin with a small account
When you are ready to try out live market conditions. Start with a small account, whether that be $100 or $250, once you're consistently profitable over 3-6months increase your account size to $500 and then maybe $750 and then $1000. Earn the right o increase your account. Trading strategies are typically perfectly scalable, so if your able to consistently make a 5% profit per month on a small account the probability is very high that you can do that on a larger account.
4. Only trade money you can afford to lose
the probability of you blowing an account as your learning to trade is very high so if you cannot afford to lose $200 then start smaller. What I have found is that mistakes due to sloppy trading are inevitable, you will make mistakes and lose money it's part of the cost of your trading education. The cost of your education is lower if the mistake is made on a small account. The experience gained in the market is the same whether you are trading a small or large account, the only difference is the cost of learning from your mistakes is significantly higher by trading a large account as a new trader as opposed to trading a small account. Trade accounts under $1000 for a minimum of a year.
5. Focus on consistent wins, not profits
Most people get into trading to make money, I know that's was my motivation and biggest downfall. Constantly chasing profits instead of striving to be consistently profitable held me back for a significant amount of time. My trading school set a challenge to close a day of trading in the green for 10 consecutive trading days which I accepted, and after 1 slip up, I made it and it changed my trading forever. What I have learned is that being consistently profitable is a greater prize than even making huge wins. Anyone can get lucky for a short time but without a consistently profitable mindset and approach the market will eventually take your profits and whatever capital you have left.
To gain the needed consistency will require you to develop consistent behaviors outside of trading. You cannot expect to be consistently profitable if your not consistent in your personal life whether it be in your beliefs, habits or behaviors. Those inconsistent attributes will hamper your development of consistent trading habits that will help you to be profitable. You can start today by implementing simple consistent behaviors, such as
Check the mail at the same time for 2 weeks every day
Review the market, the same time for 2-3 weeks every day
Practice in your simulator account every day for 2 weeks
Go for a walk every day for 2 weeks, then target a specific time every day for 2 weeks.
These are simple examples and may seem trivial to some but the truth is trading is 80% psychology, 20% skill. Developing consistent habits is putting you on the path to consistent success in the market.
Risk Management is an essential aspect of any person's trading strategy. Making a profit in the market is easy, not giving the profits back is where the skill comes. Remember small consistent profits are the winning strategy and it takes time and experience to cultivate the emotional and psychological discipline to be successful. Make the many mistakes you will inevitably make on a small account and in time you will learn from them and make fewer errors which will give you the confidence and right to increase your account.