Key Essentials for Trading Success

If are newbie to the world of trading and investing in the stock market or even an experienced trader, your trading and investing fundamentals should be absolutely clear. Like any profession, trading and investing is a professional skill and to consistently profit from the market, your skill level must be very good.

Now let’s come to the point.

In this blog, I am going to introduce you to a holistic approach to trading that is based on four essential principles. We call the four Pillars of trading. These are four critical areas that impact a Traders performance, whether you trade equities options, forex or futures. Once you learn to look across these  areas, your decisions will become sounder, your losses will be minimized and your gains will steadily increase.

The most common mistake beginning traders make is getting only one or two of these components right.  It's a very common mistake. We believe that gaining even a basic understanding of these four essential principles will make you a better Trader. Mastering them however will make you an exceptional trader. Let's have a look at each of them.

Trading System:

Trading System is absolutely fundamental to your success in trading. Because without trading system, it will literally be impossible to become a consistently profitable trader. A lot as people seem to be really unclear about what system actually is. So I'll be explaining that with the help of a few examples. But before that I just wanted to make sure that we're all on the same wavelength.

So I wanted to touch upon a few quick definitions firstly. I want to clarify exactly what I mean by consistently profitable. For most people consistently profitable means that your profits are consistent that might mean that you make 20% or 25% a year or say 3% a month etc. You are a profitable trader and on the other hand, you are a consistent trader.  When we say consistent, you can replicate what you are doing time and time again. So if you are profitable in your trades and you can keep replicating that again and again, you are a consistently profitable trader.

What is a trading system? It seems that most people just use these words interchangeably with words strategy. Conceptual clarity of what constitutes a trading system and a strategy is very important to produce consistently successful trades.

Trading system is a fixed process, a systematic approach to find a trading opportunity, executing it and closing it whether profit, loss or break-even. You do it every time and you never deviate from it.  So to say, with trading system you find out where to buy, where to sell and where to put your stop loss when you plan your trade.

However markets are dynamic. Market action may not take place every time the same way. Because the markets are dynamics, your approach may be different. And that is called strategy. For example, your strategy can be a bullish or bearish strategy.  Your strategy can be Momentum or trend reversal strategy etc. Once you identify the strategy, you again need to decide your Entry, Stop Loss and Exit points. You execute it following the same process called trading system.

Your Trading System is fixed but your strategy is variable.

 Your Strategy and System must make logical sense. You need to answer these questions: what are you doing and why are you doing it.

Strategy is broad and System is very specific.

Risk Management:

Most traders think of risk management as knowing how much to lose before the exit of the trade. Professional Traders focus on the elimination of downside altogether. There are only four possible outcomes for a trade. You can have a big winner, you can have a small winner, a small looser or a big loser. When you remove the big losses from the equation completely, suddenly your chances of success become exponentially greater. Imagine the concept of trading actively and knowing that you cannot lose money that is mind-boggling isn't it? Professional Traders understand that concept. And they know that the path to making money is to focus on not losing by eliminating risk. We really feel that the biggest difference between a professional and a novice trader is how they manage their risk. If both had the same exact knowledge base the difference would be the decisive action of the professional Trader when he is on the wrong side of the trade. When we sit down and analyze the Traders at the end of each day, we can see a very strong correlation between those of truly made it big profit and their focus on Risk Management. The pattern we saw was that people who consistently reduce their biggest losers every day eventually became the most successful Traders. If you want to make it as a professional trader you must be trained to be very consistent and eliminate losses. If you're able to learn that, the incremental profits will naturally follow. This focus is one of the biggest obstacles you had in your path to success. You need to change your attention to - how not to lose money. It is very critical mindset change that you have to make if you want to be a successful professional trader.

Trading Psychology:

Being aware of our psychology gives us the ability to be aware of the little voice in the back of our mind while we are in the trade. Having the mastery over one’s psychology means to be aware of it and techniques to help you minimize or eliminate this distraction.

Every trader and investor has different personality. Like patience, anger, frustrations, aggression, exuberance etc. etc. These are all personality traits. Different form of trading required different personality type. For example, Day-Trading is a highly aggressive type of trading and it requires a complete different personality. Similarly, investing for long term also requires a different kind of personality. So, it is extremely important that one finds out his personality type first and then decide what kind of trading or investing that he should follow.

When a trader works within his comfort zone, he remains calm and this calmness eventually helps in taking decisions objectively and execute with complete discipline. So, the question is how you know what is your personality and what type of trading is suitable for you. Well, there is no ready made answer to this question. Introspection, consultation with your trading coach, self observation, tests etc. will help over a period of time to determine right trading style for you.  

Trade Plan:

Trading plan is the key to your trading foundation. If you are serious about being consistently successful in trading in the long term, you should have a well defined trading plan. It is all about flawlessly executing your trades.

 We see too many traders enter a trade with no plan. No entry or exit plan. This guessing game will not take trader far. When you open a trade you need to know exactly what to expect. So you calculate is what is going to happen. And if it doesn't happen you need to acknowledge that and then according to the plan know exactly where your exit point is. Without a trading plan, a trader becomes victim of wild swings in the market and blow up his capital at no time. So, plan your trade and trade your plan.

Having a good plan of action takes the emotion out of trading and it gives you confidence. It takes the anxiety and fear of trading out when you are in a trade.

These are the most important components I feel are essential to becoming a professional Trader. You do not have to master all of them immediately but you do have to understand them and gradually build a powerful trading plan.

Once you finalize all four aspects of your trading, you prepare your Master Plan, the blue print for your trading business. We call it “Trading Plan”.

Once you master the art of disciplined trading and following trading plan becomes your habit, your success is inevitable.