How to Become a Better Trader: Introduction
A few months ago, a good friend approached me with a proposition. She wanted me to trade for her. Though I hate trading for other people, I happily agreed because she is a good friend of mine. Ordinarily, I take trading for other people as a liability which will give me unwanted pressure to perform. I have mentioned previously that I would rather trade my $20,000 account of my own funds than be a multi-billion-dollar hedge fund manager managing other peoples’ funds. This is simply because with my $20,000 I am comfortable if I lose everything. Nobody will question me. If on the other hand am managing a billion-dollar fund using other peoples’ funds, I will be ridiculed for being a failure.
So, I accepted trading for this friend of mine. As I have pointed out in earlier articles, I like making small profits for a long period of time. I take it a blessing when I make $100 per day. This is because to do this, my risk is pretty low. Now, my friend thought that her investment will suddenly grow to become thousands of dollars. She disagreed with my strategy. So, one day I decided to give her some money to trade despite the fact that she knew nothing about trading. The first few days she had a winning streak. She made so much money. Then things happened and she lost all the money. Today, she has become more cooperative with me. I wanted her to learn that risks in trading are real.
As a trader, you will lose money. I have many years of experience but I also have days when I lose. In fact, I have weeks when I lose money. That’s the lesson I wanted to teach my good friend. Your success as a trader will not be determined by the number of times you make money but the many times you lose money. Here I present 4 reasons why you will become a better trader when you lose money.
How to Become a Better Trader: By losing, you learn
When you open a losing trade, you end up learning the mistakes that you have done. Foolish is the trader who doesn’t learn from his mistakes. By understanding the mistakes that you make, you will then be at a good position to avoid them in future. Let’s say you opened a trade before a major economic news thinking that the news will go your way. If you lose money in this way, chances are high that you will avoid making the same mistake during the next data releases.
How to Become a Better Trader: Change of strategy
Maybe you are experimenting this strategy that you think will make you money. You need to realize that no strategy is ever perfect. Even the leading traders don’t have a 100% success rate. When you lose money, it will help you change or modify the strategy to make it more accurate. Remember that a strategy that is not changed or altered is a recipe for future disaster.
How to Become a Better Trader: Risk Management
Risk management is one of the leading skills you need to learn as a trader. In simple words, risk management is a strategy that ensures that you lose money that you can confidently lose. For instance, if you have $1000 and you lose $5, chances are that you won’t feel the pain. If on the other hand you lose $200, chances are that you will feel the pain. Risk management enables you to avoid such losses.
How to Become a Better Trader: You are in good company
Finally, when you lose money, always remember that you are in good company. Most of all top shots in the financial markets have lost money before. Bill Ackman recently lost more than $400 million dollars. Before that, his first fund, Gotham Partners failed. In the 70s, Warren Buffet lost more than $700 million. Carl Icahn, the legendary investor have also lost billions of dollars before. These losses have made these investors become better investors because they learn from their mistakes.