Earn quick, easy money from retail trading.
That’s the general term most traders or curious beginners would often come across through Forex Broker ads everywhere. Perhaps some do earn that easy money, but definitely not everyone.
An article from Babypips.com states that 70 – 80% of retail traders are unprofitable.
In addition to that, a recent measure adopted by European Securities and Markets Authority (ESMA) is that companies that offer CFDs to retail clients are now required to display “standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.”
Surprisingly, the displayed message usually looks something like this:
Your capital is at risk. You should not spend more than you can aff ord to lose and should ensure that you fully understand the risks involved. Using the products offered may not be suitable for everyone. Before you use these products, please take into consideration your level of experience, financial objectives and seek independent advice if necessary.
If a majority of traders do actually profit from retail trading, such warnings wouldn’t be necessary would it?
With the internet full of so-called “trading gurus” promoting “sure-win” strategy that are “proven” to help you earn that quick, easy money, it’s a no brainer why a majority of new traders start trading with a ridiculous amount of confidence. Going in head-first with a strong belief that they will profit from every trade. Let’s label this first group as the One-time Trader.
On the other hand, there is another breed of traders. Beginners as well, but with more realistic expectations. Understanding that every trade isn’t going to be a win, that a lot of studying and consistent trading is needed and lastly, for them to trade profitably, is a 2 to 5 years’ journey. Let’s label this second group as the Long Time Trader.
For the One-time Trader, the majority would fall into making their first major mistake; trading their hard-earned savings based on unrealistic expectations. And when they lose, it becomes a traumatic experience for them – losing a capital that they could not afford to lose in the first place.
The Long Time Trader however, trades with money they can afford to lose. Casting greed aside and acknowledging that fear of losing will still be around the corner, these traders make better decisions based on their risk tolerance. So, whenever they lose a trade or even multiple, they are better prepared get back up and to learn from their experience.
Taking a look into how both groups enter trading, it is easy to see why the latter are the ones who would eventually turn out to be the 10% who make money consistently.
Learn to walk before you run.
Learn to save before you trade.
The first step will be to save first. Do not trade with money that you can’t part with, learn from the mistakes of the One-time Trader. Think of your savings as the foundation of your financial house, you can’t build a sturdy house without a strong foundation, right?
So how can you start saving?
Keep track of what you spend on – that includes rental, transportation, food and even entertainment expenditures. Once you have recorded a month’s worth of spending, categorize them accordingly.
After having a clear picture of how you’re spending, take some time to create a workable budget. This budget should give you a guideline on how much you should spend on each category – enabling you to plan your spending wisely to avoid overspending. Do factor in a savings category – preferably 10 to 15 percent of your income, if you would like to go for a higher percentage, go for it!
If you find difficulty in saving even 10 percent of your income or would like to save even more than that, it could be time to cut back on some nonessentials – this could mean less entertainment, going without that Starbucks Frappuccino every Friday or cancelling that Netflix subscription. The best way is to understand more on what you are willing to cut back on and take small steps towards that end goal. Take for example, you could start by only having that Starbucks Frappuccino fortnightly and slowly turning that into a monthly spending. Follow Marie Kondo’s advice – if that expenditure does not spark joy or rather, help you to save money, go without it.
Having a goal is perhaps one of the best ways to stay disciplined in saving money. Try setting two types of goals – a short-term goal and a long-term goal. To not overwhelm yourself, start with a short-term goal first, this could be like starting an emergency fund (3-6 months of living expenses) or even for a new smartphone. Once you have accomplished these smaller goals, you would get more confidence and actually gain more knowledge on how to save more for a long-term goal.
By learning on how to save first allows you to understand more on your personal psychology and emotions. Through saving, you will learn how to prioritise your needs and wants, how to budget, risk management and most importantly patience. Learning these and having set up a strong financial foundation reduces the emotions of fear and greed that usually drive new traders to make irrational decisions. If you are serious in becoming a profitable trader, have a look at our educational series here to trade more confidently and most importantly profitably in the long term.