What does winning in the trade mean to you? Most people would probably say that it involves making a profit. Well, although that would not be a wrong answer, it wouldn’t include “all” of the story. The story would also include what you’re doing to ensure that you in fact will “consistently” win. So many traders say that they want to win, but so few are willing to invest the effort by either finding out what is required or once they know then following through to consistently get desired results. And, before going any further, we must define what it means to be a winning trader because a large number of traders are laboring under a false premise that winning “only” has to do with making a profit in a trade. That couldn’t be further from the truth. Although profit is important, it is not the end all and be all of “successful trading,” which is much more about following a sequentially ordered series of steps, we’ll call them “essentials.”
So, let’s begin at the beginning. After you’ve tapped into your retirement account or you’ve realized that you can relieve your savings of enough money to open a brokerage account; there is a list of “essentials” that you “must” follow in order to get the results you want, in other words to “win.” These essentials begin with market knowledge; you must identify an asset class that you intend to trade. Secondly, you must develop and use a trading (macro) plan that outlines your purpose, goals and the strategies you’re going to utilize; what time frame you’ll use, and your financial objectives, to name a few. Next, you need a set of rules listing guidelines for entries and exits, setups etc., and these rules mostly stem from your macro trade plan. Fourthly, a money & risk management strategy must be in place for every trade. Of course you must include appropriate position sizing. And, lastly you must have self-discipline, without which you will not make it as a trader. These are all critical elements of successful trading; and now we’ll take a closer look.
Getting the knowledge to be a successful equity, futures and/or currency trader can be a tough task; because your internal stories about your ability to learn can be either a boon or a bane. You can become your own worst enemy due to those internal stories. For instance, you determine what you need to learn and to do; then you get the story (from yourself) about how difficult it’s going to be, or how you screwed it up the last time. In many cases negative internal stories can disrupt and dislodge your ability to learn and stay on course. Negative internal stories most often are established in childhood and built upon the negative messages you received about yourself from authority figures, family, and peers. These negative internal stories or limiting beliefs 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 may have left you with low self-esteem, a poor self-image and, in some cases, self-hatred. 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 rewriting old negative stories has begun. So, one of the important points to getting the knowledge, is getting the knowledge of yourself as well as the market.
After market knowledge, you must develop your trade planning. Here you will identify and formulate strategies that will increase your trade probabilities. On a macro level, it’s about organizing and planning your trading; on a micro level, it is about organizing and planning each trade. Your focus will be to figure out how to accomplish the goal and what actions it will take. 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.
Successful trading involves rules and these rules form the foundation of your behavior. Early on most traders get their rules from books, teachers, mentors, etc. This is fine, but the thing to remember is that some of your most important rules come from the pain and hard knocks of experience; and your trading is affected by the 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. These lists of “rules” or cultural myths are reflected in every decision of your life and trading. Many of these rules revolve around money, power, worthiness, competency, and winning and many of these rules never see the light of day in your awareness. In other words, if your choices go unchallenged, then the underlying motivation of that thought or behavior remains out of conscious touch. However, once the rule is identified, it can be challenged and changed. And, be careful about following “fool’s rules”; these are the ones to be challenged and changed. For example:
- 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 I have to make money
So, identify your rules carefully and make sure that you are following effective rules and not “fool’s 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, by far the most important “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 your money management strategy. The critical factor to being successful in the financial markets is to follow your plan and your rules. First and foremost is to protect self. Effective self-discipline is not as much about will-power as it is 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 “Mastering the Mental Game” Online and On-location courses we teach you “how” to attain, maintain and sustain your self-discipline – the crux of your “A” Game. Ask your Online Trading Academy representative for more information. Also, get my book, “From Pain to Profit: Secrets of the Peak Performance Trader.”
Dr. Woody Johnson