Traders' questions reveal their stages of development. Beginners always ask about trading methods-what indicators to use, what systems to choose. They want to know the right Stochastic parameters and the best length of a moving average. Most newbies are so excited about profits and so clueless about risk that no fancy tools can save them from disasters.

Those who survive the stage of original innocence move on, thanks to a combination of luck, work, or an inborn sense of caution. They learn to select trades and find where to buy and sell. They start asking why their profits are so inconsistent, if they know so much. How come their account is up 20% one month and down 25% the next? How come they can make money but not grow equity?

Traders at the second stage often grab a profit and spend it before that money evaporates. They feel insecure about their ability to make money. I remember ages ago taking a penny profit from Swiss franc futures and rushing to a jewelry store to buy my then-wife a necklace. Another time, I used a little less than a cent profit to buy my daughter an expensive Abyssinian cat. Those cats have long lives and hers, named Swissie, used to remind me of my old impulsive trading days.

Traders who get stuck at that level keep bouncing up and down like a flower in an ice hole. To move to the next stage, a trader must overcome the biggest obstacle to winning-the person he sees in the mirror. He must recognize his role in putting on impulsive trades, undisciplined trades, trades without stops. No matter how clever his methods, he is not a winner until his mind is in the right place. His personality, with all its quirks, influences results more than any computer. Traders at that stage ask: "Do I have to put in stops or can I use mental stops?"

"Why am I afraid to pull the trigger?" "How come the trades I don't take work out better than those I take?"

A trader who survives, succeeds, and moves up to the third stage feels relaxed and calm. When he asks questions, he is interested in money management. His trading system is in place, his discipline is good, and he puts a lot of time into thinking how to allocate his forex trading market capital and reduce risk.

These three stages form a pyramid, a structure with a broad base and a narrow top. The journey has a high attrition rate. I wrote this book to help make your passage a little smoother, faster, less painful, and more profitable.

What are the reasonable profit targets for different stages? The numbers I'll give you may surprise you as low. You want to make more money, and you should feel free to reach higher and do better if you can. These guideposts should help you see whether you're meeting the minimum requirements. They help you recognize when you are in trouble so that you can stop, think, and adjust your methods. If you trade for a bank and keep missing profit targets, your manager will pull your trading privileges. A private trader has no manager and is in charge of his own discipline. If this book helps you stop, think, regroup, and move higher, I have not wasted my time writing.

1. BEGINNER

A. The minimal acceptable performance level for a beginner is a loss of 10% of trading capital in a year. Traders are shocked when I give them this number. They forget that most beginners blow themselves out fast. Many lose 10% in a month if not in a week. If you can survive for a year, learn about trading, stock price, and lose less than 10%, your education is cheap and you are way ahead of the crowd.

B. The goal of a beginner is to cover trading expenses and generate annual return on his account equal to one and a half times the current rate on T-Bills or a comparable riskless instrument. You have to charge the cost of software, data, classes, and books, including the one you're reading, against your trading account. Beginners often throw money at gurus who promise the keys to the kingdom. Charging your tradingrelated expenses against your account introduces a useful

but trades because he enjoys spending fortunes on political and charitable causes. Curiously enough, when you no longer have to stretch for the money, it starts flowing in faster than ever.

reality check. If you can cover them and then beat the Treasury bills, you' re no longer a beginner!

2. INTERMEDIATE (SERIOUS AMATEUR OR SEMIPROFESSIONAL )

A. The minimum acceptable performance level for a serious amateur is return on investments equity twice the current rate on T-Bills. Your improvement is evolutionary, not revolutionary. Cut some of your losses a little faster, grab some of your profits a little sooner, learn a few more tricks of the trade. Once you're covering your trading expenses and making double what you could get from riskless paper, you're miles ahead of the efficient market value theorists.

B. The goal of a serious amateur or a semiprofessional is to generate a 20% annual return on equity. At this stage, the size of your trading capital becomes an important factor. If you are trading a million dollars, you may be able to start living off your profits. But what if you trade a relatively small account, say $50,000? You know you can trade, but 20% of $50,000 is not enough for a living. Most undercapitalized traders destroy themselves by overtrading, trying to squeeze unrealistic returns from their tiny accounts. Take crazy risks, and you'll have crazy results-both on the way up and on the way down. Better stick to your trading system and leverage your skills by trading other people's money (see "Going Pro" on the next page).

3. EXPERT

A. The minimal performance targets are more flexible for experts. Their returns are steadier, but not necessarily higher than those of serious amateurs. You have to continue outperforming T-Bills-to fall behind them would be ridiculous. An expert may grab a 100% return in a good year, but trading a serious amount of money year after year, just staying north of 20% is a very good performance. Certified geniuses such as George Soros maintain a lifetime average of nearly 30% per year.

B. The goal of an expert trader is to put enough money into riskless investments to be able to maintain his current standard of living forever, even if he stops trading. Trading at this stage becomes a game that you continue to play for your own enjoyment. Soros certainly doesn't need any more money for personal expenses