Essentials of Trading

When looking at Trading as a whole, one can whittle everything down to a few key essentials that must be acheived or adhered to, in order to ensure a chance of success.  A broader view can be found at this previous post on the Key Steps To Trading Success. However, the aim if this post is to really focus in on some specific things.

To start with you need a Plan, most successful people have got to the top because they have had and have then implemented a plan.  In this case an overarching Trading Plan covering all apsects of the ‘Why, What, When and How plus others’ is needed.  See my previous Blog article on Trading Plans.  Then for each trade we take, we need a specific Trade Plan, because Prior Preparation Prevents Poor Performance (5Ps).  If you have a Plan then at least it can be modified, if needed, but without a plan you are onto a loser from the start.

Next comes the critical element of robust Risk and Money Management to ensure that even if you have a run of losing trades you are still in the game tomorrow, next week, next month, next year.  Most professional traders I know, don’t risk more than 1% of their trading capital on any single trade and probably no more than a total of 3% to 5% on open trades at any one time.  They will also use Fractional Money Management too, so as well adjusting their position size to take into account the size of the Stop Loss, they will also take into account how much Trading Capital they have to acheive that maximum 1% Risk on any one trade.  A trader can use a strategy with a 40:60 Win:Loss Ratio and still make money if they employ good Risk and Money Management.

When ever you take a trade you absolutely must undersatnd the CONTEXT of that trade with respect to that market; so will it be a Trend Trade, Counter-Trend Trade or a Range Trade, will it be a short term trade or a longer term trade, is it a Swing Trade and so on.  Without understanding the context of your trade how can you plan it properly in terms of Stop Loss size, Profit Targets, when to move to Break Even, how long to keep it open, when to close it out etc.  Also, is the trade in line with Fundamental Analysis as well as Technical Analysis or against it?

Then the question is how do I acheive an understanding of the Context?  Well firstly you need to be looking at multiple timeframe charts and use a Top Down / Bottom Up approach to look for clues in terms of Supply and Demand, Price Action, Fib Levels etc and focus in on any potential CONFLUENCES.  Confluences are areas where different timeframe charts have overlapping things happening. Then also develop a view of the Fundaments in relation to the relevant economies of the countries which make up the currency pair you are analysing.  Are the economic fundamentals the same, diverging or converging?  Is there any shorter term market sentiment which might differ from the overriding fundamental bias?

If you can establish the ‘Context’ and identify confluences and trends then you can start to think about employing your ‘Strategy’, whatever that may be.  Idealy you need a Strategy that has a high probability of success as this will give you the next essential element which is ‘having an EDGE‘.  If you haven’t got a strategy or system that has a tested and proven probability of success, then you probably haven’t got an edge.

If you think about it, if you have a proven strategy and then combine that with good the following: (Technical and Fundamental Analysis, plus good Risk and Money Management and can establish the Context for any trade you take, plus good Trade Planning including Supply and Demand and Proce Action, Risk: Reward, Entry, Stop, Targets, Timescale etc) then you will be increasing your Edge by overlaying all these things and so will increase the probability of success of your trades.

Then once you understand the importance of the above you wil have to go away and PRACTICE it, until it all seems second nature to you.  Anyone can practice, but what you need to do is Perfect Practice makes Perfect and by that I mean don’t keep doing the same thing over and over again if the results are always poor.  Instead, Practice, Analyse, Feedback, Amend, Practice and so on to acheive an iterative process that improves as it progresses.

Lastly, to successfully implement the above and be a good trader you will need to develop and exercise PATIENCE and DISCIPLINE in all that you do when trading.  As my Trading Mentor used to say to me, you need the Patience of a Saint and the Discipline of a Soldier.  These two points are covered by your Trading MINDSET.  Once you have all the above sorted it then comes down to getting your head in the right place, your Mindset.  Trading Psychology is increasingly becoming a recognised factor in successful trading.

So in Summary, ask yourself if you have and are employing the following critical elements in your trading:

  • A Trading Plan
  • Risk and Money Managemet
  • An understanding of the Context of each and every trade
  • Utilise Confluences
  • Utilise Supply and Demand and Price Action
  • A proven Edge
  • Practice towards Perfection
  • A Trader’s Mindset including the exercise of Patience and Discipline

If you need help with any of the above then you might consider attending one of our seminars or workshops or our Personal Trading Mentorship Programme.  If you are relatively new to trading then sign up for our free Forex Trading Success Formula and  Forex Guides.  These will help to give you a good grounding from which to move forward.