Success in trading requires a number of crucial elements without which failure is all but guaranteed. These essentials begin with market knowledge; you must acquire an understanding of the asset class that you wish to trade. Secondly, you must develop and maintain a trading business plan that outlines firstly your purpose, goals and the strategies you intend to employ; what time frame you intend to trade whether day trading, swing or longer term; the number of trades you plan to execute in one session and financial objectives. Next, you need a set of rules to govern your trading: The entries and exits, what type of setups will do and won't, etc., and these rules all stem, in large part, from your trading plan. Fourthly, you must have a money and risk management strategy in place for every trade. And, of course, you must have mental and emotional tools in your tool belt...honed and ready to deploy in the service of self-discipline; for without self-discipline, none of the other essentials will help you. These are all critical elements of successful trading. Let's briefly take a closer look at these essentials.
There is a tremendous amount of Fundamental Analysis and Technical Analysis involved in successful equity, futures and currency trading, which are all a part of market knowledge...and you must have market knowledge. However, getting that knowledge can be a tough task because your attitude regarding your internal stories about your ability to learn and assimilate knowledge can be either a boon or a bane. Often, you become your own worst enemy due to those internal stories. For instance, you determine what you need to learn and do; then you tell yourself the story about how difficult it's going to be, or how you "flubbed" it up the last time. This type of internal story is called a "negative feedback loop." In many cases, a negative feedback loop can disrupt and dislodge your ability to learn and stay on course. Negative feedback loops most often are established in childhood and built upon the negative messages you received about yourself from authority figures, family, and peers. These negative loops proceed very much like recorded messages that have been playing and replaying in your thoughts - phrases like "You can't do that," "You'll never make it," "You dummy," "You'll never amount to anything," and other types of abuse. Statements like these are hurtful even to an adult, and may have left you with low self-esteem, a poor self-image and, in some cases, self-hatred. If you've swallowed these labels whole, they can't be digested by your system. They remain stuck, deep in the psyche, leaving you frozen at that point in your childhood development with the same logic and reasoning abilities of a child at that age. Consequently, you react automatically when the stifled part of your personality is activated by external trading events pushing the button on your recorder. However, with self-knowledge and learning how to successfully handle the negative triggers when they surface, your self-image is lifted, and the process of breaking the old negative loops has begun. So, one of the important points to getting the market knowledge is getting the knowledge of yourself, as well.
After you have acquired the knowledge necessary to trade, you must then develop a macro Trading Business Plan. Here you will identify and formulate protocols and strategies that will increase your probabilities of getting the results you want. On a macro level, we are talking about organizing and planning your trading business; on a micro level, it is about organizing and planning your trades. Your focus will be to figure out how to accomplish the goal and what actions it will require. This process turns your intention into a concrete goal, further fueling the fires of positive emotion and action. Additionally, it is important to organize both on a macro level and a micro level in order to plan effectively; in other words, you must get in perspective the big picture and the details. You'll want to get a picture in your mind (a vision) of the outcome. Here is where the vision of your intention is brought to life and turned into a practical process, a step-by-step action plan. Dreams are a dime a dozen. Everybody has them. But it is their execution that is most important. This plan, then, is a logical map showing where you want to go and how you will get there. "When a man doesn't know what harbor he is headed for, no wind is the right one."
Successful trading involves rules, and these rules form the foundation of your behavior. Yes, you must have a list of rules that govern your trading. But I'd like to approach this subject from a slightly different vantage point because your trading is also affected by other rules in your life. In fact, as humans grow, they develop a set of typical responses to reoccurring events. These responses or patterns of behavior can be termed a list of rules that you live by. For example, if you drive in the streets, there is a set of rules that you follow for both safety and the orderly movement of traffic. These lists of "rules," social mores or cultural myths are reflected in every decision of your life. They are often unconscious. They involve lessons we have learned and the cultural lenses we have created through which we see and judge the world. Many of these "rules" revolve around money, privilege, power, worthiness, esteem, competency, winning and the need to do or have it now. For the most part, these stories or rules of living never see the light of day in our consciousness. In other words, if you are unaware of these rules, then your choices go unchallenged, and the awareness of why you chose that thought and/or behavior remains out of conscious touch. However, once the rule is identified, it can be challenged and modified as needed. Also, as you challenge each rule, you uncover other assumptions based upon that rule being truth rather than myth. The interesting thing about mythology is that you believe it to be real. To you, it is not mythology; it is truth. Consider this: Trader Dan believes in "taking advantage of every opportunity in life." This belief becomes truth in his mind and generally may not be a problem for him. However, in the markets there is a distinct disadvantage to overtrading. In fact, this simple yet powerful "myth" can cause your downfall in trading even though it can serve you in life. Other "Fool's Rules" or trading myths might be:
Get back to even by doubling down on losers
On a price action pattern, jump in early to make the most profit
Stops only take me out too early; it will always come back
Big position size makes big money
I can trade as many times a day as I want; the more I trade, the more opportunities
So, identify your rules carefully and make sure that you are following effective rules and not "fools rules."
Of course, you must have a money management and risk management plan. This would also include appropriate position sizing; that is, having the number of lots, contracts or shares appropriate to your trading account. Putting on 5 contracts in a position that represents over 2% of your portfolio is sheer folly and will separate you from your money pronto – it would only take a few sour trades to blow up your account. Additionally, you'll want to have a risk/reward ratio that makes sense. Most successful traders will use a 1:3 ratio, meaning that they are willing to risk $1 to gain $3 in any particular trade as a minimum; and the greater the risk/reward ratio, the better the return when you do have a winner.
Now, another "essential" element of trading is self-discipline. Without this it doesn't matter how much market knowledge you have or how strong your set of rules are or you money management strategy. The critical factor to being successful in the financial markets is to follow your plan and your rules. The first order of business is to protect yourself. Effective self-discipline is not about will-power, it's about harnessing and managing your thoughts and emotions. You've got to have mental and emotional tools in your tool belt in order to bring your "A" Game to the platform. In the Mastering the Mental Game class, we teach you "how" to attain, maintain and sustain your self-discipline – the crux of your "A" Game. Ask your Education Counselor for more information. Happy Trading!