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The 5 Stages of Trading

The 5 Stages of Trading
August 14
16:40 2012

Psychologists have created a model for assessing how people change their behavior. Commonly known as the Stages of Change, this model describes five steps in this process: precontemplation, contemplation, preparation, action, and maintenance. Much like these Stages of Change, day traders also go through stages in the development of their career before they become consistently profitable.

Stage 1: Curiosity

In any career process the first step towards engagement is curiosity. Curiosity for day traders comes in the form of asking questions such as “Can I do this?” or “Is it possible to make money trading?” This curiosity leads to information gathering and individuals try to find out what day trading is and how it works. Of course, the primary interest is to understand how the money is made.

Stage 2: Testing the water

At this stage curiosity has grown into desire and an individual wants to get in and actually test the water. This can happen in a number of ways such as opening a trading account with own funds, joining a proprietary trading firm, or setting up a simulated trading account. In any scenario, individuals are introduced to the thrill of making money and the heart wrenching displeasure of losing money. This is also the stage where people often make the mistake of thinking that they will eventually “figure it out” and continue to invest their own capital into the market only to lose everything.

Stage 3: Education

After getting beat up by the market a little (or a lot), individuals learn quickly that they need more information and knowledge to be successful at day trading. At this stage it is important that individuals gain a foundational understanding of fundamental and technical analysis. However, in their quest for knowledge, they will come across a multitude of people or firms who claim that they have the secret sauce which will guarantee results. These systems usually come at premium prices and have a varying degree of complexity. Getting the right education is the longest and most trying stage because it is up to the individual to navigate the landmines of misinformation and poor education. Unfortunately (or fortunately), there isn’t one way of trading and because the markets are new every day the information is always changing.

Stage 4: Rogue Trading

After learning a few new tricks, most individuals will strike out on their own to test their trading skills. Most people will actively use only 20% of what they have learned. However, through trial and error, individuals start to settle on a style of trading and select which markets they want to trade. It is also in this stage that individuals begin to understand the importance of having a more disciplined approach to the market.

Stage 5: Develop a Strategy

This is the stage where an individual graduates from being someone who trades to becoming an actual day trader. All the information that they have gathered to this point and the experience that they have had in the markets are assimilated to help the trader develop a strategy. This strategy becomes the trader’s compass by which they make decisions every day. It is constantly being tested and tweaked for perfection. With this strategy, traders can develop a more disciplined understanding of the market and filter all the information that they gather to the elements that are most critical for their success. This stage is really never over because as the markets change traders should respond by adjusting their strategy.



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Today’s Day Trader Strategy

One of the most common and destructive mistakes a day trader makes is to simply not follow their plans. Temptation, an “obvious signal”, and just simple greed can lead traders down the road of being undisciplined. This is without a doubt one of the most dangerous mistakes, as traders will often lose more than they originally planned as they raised their amount risked.