Tuesday, April 10, 2007

Three Steps To Take If You're A New Trader Losing Money

A reader recently declared herself at wit's end losing money in trading. The learning curve can indeed be very frustrating. In my book Enhancing Trader Performance, I tried to present a framework for thinking about that learning curve and navigating the trail from being a novice to being competent to being expert. Here are a few steps that are worth considering if you're a new trader frustrated by losses:

1) Stop Trading - The first law of developing yourself as a trader is to survive your learning curve and preserve your capital. First develop your trading style by trying out different trading approaches in paper trading mode, preferably through the simulation mode of a trading platform. (Ninja Trader has a free simulation engine worth considering). Make all your mistakes on paper before they eat up your capital. Yes, paper trading is not the same as trading real money, but if you can't make money on paper, you surely won't do it under the heat of real time risk and uncertainty.

2) Look for Guidance - I encourage beginning traders to learn Market Profile theory as a way of thinking about markets. There are also good trading books out there by such folks as Linda Raschke, James Altucher, Curtis Faith, and John Carter. There are excellent trading blogs that detail trading methods and patterns; check out posts from Trader Mike, Trader X, Charles Kirk (including his members' site), Brian Shannon, and some of the ones on this site. Woodie runs free trading rooms, with an emphasis on mentorship. Check that out. There are many resources out there.

3) Keep Meticulous Records - Review which kinds of trades are working for you and which aren't. Keep tabs of your mistakes, but also identify what you're doing that's working. Use each trading session as a learning experience. Your goal is not to make money. Your goal is to learn markets. Expertise takes years to develop. Don't pressure yourself to trade your capital against pros until you're sure you're ready.

Lots of observation and immersion in markets and plenty of experimenting with different markets and trading styles--all are important in advancing the progression toward expertise. When new traders are frustrated with losses, it's usually because they've tried to short-circuit the learning curve.