Key points covered in this podcast
- Should you trade?
- Ability and willingness
- Running the numbers
- Active or passive mindset
Should you trade?
Should you trade? It is a simple question, but not easy to answer. There are many factors to consider but the most fundamental factors center around your ability and willingness to trade. If you answered ‘yes’ to the first 2 questions you can start to consider how much capital you are prepared to risk and whether you prefer an active or passive approach in your journey of wealth accumulation.
Ability and willingness
Ability - The first question you should ask yourself is whether you have the ability to trade. In other words, do you have the asset base? Senior analyst, Tyler Yell compares this to a runner’s aerobic base in preparation for a marathon. A stronger aerobic base, means you can run more miles without body breakdown which leads to a more successful race despite the inevitable developments on race day.
Without an appropriate aerobic base, you're not really able to run the marathon. You may be willing, but that has little to do with whether or not you can cross the finish line.
Willingness– This focuses on the psychology surrounding trading. Naturally, willingness comes after ability in terms of importance. However, if you happen to have the willingness but little ability, then you can follow James Stanley’s recommendation of formulating a strategy on a demo account. Be sure to check out this interview as James shares the various experiences that shaped him into the trader he is today.
Running the numbers
If you are still reading this, you probably have a degree of ability and the willingness to trade, so we will delve a little further. As a rule of thumb, traders should be looking to set aside 10% of their overall investment portfolio but only if you are able to live without this amount. This fits into the trader psychology as you will be less emotional when trading with capital that you can afford to lose, even though this is not the plan.
When you need the capital you are trading with, you tend to be greedy, but not in a good, Gordon Gekko kind of way. Rather, you become greedy to the point where you're unable to take a loss. Paul Robinson, in the recent interview on the show, said that Greed breeds fear as it often arises from inability or unwillingness (there are those two words again) to take a loss, causing you to hold on to a loser longer than you should.
Active or passive mindset
Another point, second to ability and willingness is whether you want to be active or passive in your journey of wealth accumulation.
Trading is a decisively active way to grow your capital. Typically, you'll become fond of specific markets or asset classes followed by a form of analysis and risk management that you'll use to hopefully take you to the promised land.
Either way, whether you're a day trader or swing trader, you'll likely find yourself eating, breathing, & dreaming about markets. That's ok. Your love for the markets doesn't give you an edge other than increasing the likeliness that you'll stick around to build a strategy that works for you.
If you prefer passive investments like ETFs, then you're likely not reading this, but if you are, trading probably isn’t for you just yet. Passive investors celebrate in bull market but can find themselves wanting more when volatility spikes. It's fair to say that low costs to investing are an 'edge', but depending on the ETF at play, a broad breakdown could cause advocates of passive investing to look for ways to become more active in determining where they should be investing.
Helpful Resources
- If you are just starting out on your trading journey and interested in forex, it is essential to understand the basics in our free New to Forex trading guide.
- At DailyFX we researched over 100,000 live IG Group accounts to find out the secrets of successful traders and published the findings in our traits of successful traders.
- At DailyFX we host a number of webinars for all levels of traders. If you find you have more questions than answers, look out for our regular ‘Trading Q&A’ webinars where our in-house experts help expand your trading knowledge.
- Supplement your trading knowledge and strategy development with our expert Trading Guides
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
