TheRiskBlog

When people start out as traders they always have one goal. And that is to make money - preferably lots of it. People have different ideas but most often we hear something along the line: “..i want to be able to make a living trading…”, and “…i have this amount x right now but at the end of the year i would like to have doubled it…”.

Now this is all fine but how do you reach such a lofty goal? Let´s have a look at a few ways:First of all most people forget to follow up on their goals appropriately. It is one thing to have the goal to make a living trading but you have to follow it? What do you have to do?

The most important thing is your commitment to reach it, it is not enough to just have the goal you must do things to reach it. If you want to be able to live off of trading at least you have to follow these steps:

1. You have to make sure that you define the term “being able to live off of trading”. How much money do you have to make in a years span? From our experience with our customers in the TEP (Traders Evolution Program) we came up with the following practical formula. First find out what you really need per month. Let´s say to cover all of our expenses plus be able to live decently we need $2500 per month. Now multiply that by 12 months and you come up with $30.000
   In order to find out what we need to make every single trading day we need to divide that by the number of trading days we have throughout a trading year. Usually a trading year has around 220 trading days but be careful with that division. If we divide our $30.000 just by 220 trading days we don´t take into account the fact that most probably we will not be able to trade all of those 220 days. Also we miss out on taxes, so from our experience it is more practical to just use around 150 trading days for our division which leads to $200 a day. So now we have set a realistic goal that is derived from our real expenses and needs.
2. Now that we know how much we have to earn each and every trading day we can adjust how much we want to lose in case that happens. First of all we need to make sure that we understand that losing is part of the game. Losing money while trading is as common as refueling your car when driving. There is just no way around it. Since we know already that we have to earn $2oo a day we definitely need to stay within this confinement with our losses. So again, let´s be realistic about it and say we divide that by 4. The result is, we are not allowed to lose more than $50 a day no matter what.
3. We know how much we can afford to lose and how much we need to win what else needs to be done. Well, we need to find a method on how to pick our trades. This can be everything, we can trade off the tip from our neighbor or we could read the newspaper or we can follow technical analysis. But what we can not do is mix them up. Instead we need to try out several methods, then find a method that works for us (i.e. produces winning trades) and follow that method. We can and should try out other methods but we should not trade on them with real money unless our proven method does not produce any winners any longer.
4. We definitely need discipline. Once we have found a method on how to pick our trades, we really need to follow these methods. Let´s say we make our money picking trades from the news and we are good at it then we need to refine our method of how to pick the news. We need to make a checklist and follow it. What news are interesting, why are they interesting, can i find similar news and so on. So always work on improving your method - not your trading.
5. We need to understand the risk involved. Any time we open a trade there is the risk involved that we can lose money. We need to understand that and then we need to cope with it. How is risk defined, what is it, what does it do in our account and so on. So we need to write down, how much risk is involved, whether we trade highly risky assets or just the opposite. Then we need to write down how we deal with that kind of risk in our account. When do we stop a trade? How much can we lose? How many positions should we open up at any one time?
6. And we need a win management system. How do we deal with our winning trades. How much of the money do we reinvest? How much stays in our account? How much is pulled out and put to work in other investment areas like real estate?

There are several other things that need to be done to be successful but the main thing is, we need to stay motivated, disciplined and ahead of the curve. Always ask yourself a lot of questions, try to answer them and always analyze your losers. The hold the key to success.

1. Next build up knowledge about certain stocks. For example you own an iphone or an ipod then find out all you can about Apple. This knowledge helps a lot knowing how the market trades certain stocks.

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