Successful trading rests upon four pillars.
The first pillar is a valid strategy for entering and exiting the market-exiting with a profit and with a loss. Your entering and exiting strategy can be fundamental or technical or a combination of fundamental and technical. You can use fundamentals to tell you what to trade and technicals to tell you when to enter or exit a market. Most people think this is the most important aspect of trading and spend most of their efforts here. In truth, it is important; but it is only one leg of profitable trading.
The second pillar is effective position sizing and money management. How much of your money are you risking on any one idea? If you're right 99% of the time-and nobody is- and you risk all your money on each idea, you will lose it all on the 1% when you're wrong. Furthermore, if you risk only 50 cents to make a dollar, you will break even if you're only right 34% of the time. Arguments have been made that this is the most important component of trading; but, again, it is only one component of the formula.
The third pillar is low transaction costs. This includes commission and slippage. The more frequently you trade, the more important transaction costs become. If you're trading a one minute chart on the S&P (and believe me I know because I have done this), and you are slipped a full point on entry and exit, it's virtually impossible to make money.
The final pillar of successful trading is self mastery. Successful trading requires the ability to perceive clearly, to think in probabilities, and to apply one's methods to the market in a timely fashion. One needs to accept loss and to cut losses. One needs both courage and control. One needs to be comfortable with uncertainty. One needs both optimism and realism. Self mastery in trading means to be disciplined; that is, to be in integrity with your trading goals-to do consistently whatever it takes to succeed whether or not it's comfortable or easy.
The formula for successful trading is this:
Strategy plus Money Management plus Low Transaction Costs multiplied by Self Mastery equals Success.That's right. You are the multiplier effect of your trading results. It's not enough to have a proven strategy and sound money management and low transaction costs, although the absence of any one of these could cause failure. The fact remains that you are the one who makes everything happen. You are the one who selects the strategy and designs the money management. You are the one who arranges for reasonable commissions and who will not continue with a firm that gives you excessive slippage. More importantly, you are the one who facilitates the whole process. When you falter, the whole process collapses with you. When you succeed, time is on your side; because the probabilities are with you.
This column is dedicated to you, and to your achievement of self mastery as a trader. What if you could use your mind power to become a consistently profitable trader? What would happen if you could learn to harness the power of your perceptions, your thinking, your emotions, and your actions?
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