Keys to Successful Trading

Since I started trading about 1+ year ago, I've come to a conclusion of what are the most important components of successful trading. No, I don't have the solution to become instantly and constantly profitable yet, but I have an idea of how to manage my growth in trading.

So what are the keys to successful trading?
3 Things:
a) Method / Trading Strategy
b) Money Management
c) Psychologcal Management

a) Method / Trading Strategy
A method is a trading strategy, the tools of the trade. How do you decide when and where to go long or short? What price patterns do you look at? What indicators do you look at? What has to happen to the price and indicators before you enter a trade?

Bascially, a trading method must VERY CLEARLY state 3 things - Entry Level, Target Level, and Stop-Loss Level.

Naturally, your trading strategy should have a positive expectation over the long term. What does this mean? Basically, your total profits from your winning trades should be greater than the total lossess from your losing trades. (I already hear people saying "DUH").

While it seems like common sense, there are people who employ trading strategies which promises 90% winning trades. Now, I have no problems with strategies which give me a 90% success rate, until I realise that these 'strategies' do not use a stop-loss! So while you may have a large number of winning trades, just one losing trade is enough to wipe your entire account out! Bad strategy.

On the other hand, if you have only 40% winning trades, and profits on your winning trades are 2 times more than losses on losing trades, that is still a profitable strategy. Here's the math:
Assuming losses at 50 pips and profits at 100 pips on average.

Expected profit/loss
= 40% x 100pips + 60% x (-50pips)
= 40pips - 30pips
= 10pips

This is just an example that a good strategy doesn't need to have many winning trades to be profitable. And many trend following traders understand this well.

Another important aspect of the method, once you actually enter into a position, is called position management.

This means that your method should tell you how to manage your trades at it enfolds. Do you take profit on 80% of your trades as prices move in your direction or do you enter another position?

Do you shift your stop-loss to protect profits as prices move, or do you leave it at the original identifed levels?

Knowing exactly how your method protects your profits and allows you to take advantage of big-moves will help you to be more profitable (we all now what it feels like to take a 30pip profit, only to see prices jump by 100 pips thereafter!).


b) Money Management
Now that you know when or where to enter, take profit and stop-loss. How much of your account do you trade? Some people report that they have 40%-50% profits or losses each week! To me, I think that's over-exposing your account to your trades.

Generally, I would risk no more than 2% per trade (which I can identify with my entry and stop-loss levels), and no more than 3 trades at any one time. So I'd risk at most 6% of my account at any one time.

There are two money management methods out there that I know of - Fixed Fractional Method, and Fixed Ratio Method. I had a post on effective money management in the past.

c) Psychological Management
Last but not least, Psychological Management. Although an overlooked aspect of trading, any trader who has started a live account will be able to identify with some of the following scenarios:

- Not entering a trade that you identified would be profitable. Not soon after, the prices move in your predicted direction and you are knocking your head against the wall wondering why you didn't take the trade.

- Entering into a trade and realising that price is creeping towards your stop-loss. You think that prices will definately and eventually move towards your target, so you shift your stop-loss further. Finally, you took a much larger loss than expected.

- Your trade encounters the stop-loss, and you decide that it can't go down/up much more. So you decide to long/short with double the capital to make back your losses..... only to triple your losses! (That's 2 times the original loss you were trying to make back + the original losss).

These's are classic scenarios where emotions of greed and fear take-over your mind like an alien-abduction, and you no longer follow your method nor your money management rules. I don't think there's a course that can truly address this aspect as it is largely internal. It generally improves with experience and lots of conscious effort.

One of the popular books on this aspect is "The Disciplined Trader" by Mark Douglas, which I think should be in the trading library of any trader. Even if you don't like the way he writes, the knowlege of what goes on within your head when you trade is extremely valuable. The next time you find that you are "not yourself", you know what - Fear and Greed has reared its ugly head!

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These are what I think are the most important aspects of trading, and I constantly work at developing all 3. Of course, you are entitled to your own opinion of what successful trading entails, but I hope there's something interesting in this post for you. :)

Good luck!