The Elements Of Successful Trading
The Elements Of Successful Trading
Thus far we’ve talk about the importance of a firm grounding in the basics of Forex, and the importance of practice to further that basic knowledge. From here on out, it’s time to start putting together the rest of your trading puzzle.
Right in this chapter we’ll define the elements of your success as follows;
- The Right Psychology
- Risk Management
- Knowledge is Everything
- Your Trading Game Plan
- Trading System
THE RIGHT PSYCHOLOGY
One of the most important pieces to your success puzzle is your own trading psychology. This covers everything from why you have decided to begin trading Forex to how you approach trading. It also covers the steps you take to keep your emotions out of your trades. A basic understanding of you, and why you’re here, is the one element that can work more towards your own success than any other idea we cover in this book. In fact, a poor mindset and emotional trading is likely the number one reason why traders fail. The next most common reason is a poor money management system.
RISK MANAGEMENT
Risk management is one of the most important topics you will ever read about trading.
Why is it important?
Well, we are in the business of making money, and in order to make money we have to learn how to manage risk (potential losses).
Ironically, this is one of the most overlooked areas in trading.
Ironically, this is one of the most overlooked areas in trading.
Many forex traders are just anxious to get right into trading with no regard for their total account size.
They simply determine how much they can stomach to lose in a single trade and hit the “trade” button.
There’s a term for this type of investing….it’s called…
When you trade without risk management rules, you are in fact gambling.
You are not looking at the long-term return on your investment. Instead, you are only looking for that “jackpot.”
Risk management rules will not only protect you, but they can make you very profitable in the long run. If you don’t believe us, and you think that “gambling” is the way to get rich, then consider this example:
People go to Las Vegas all the time to gamble their money in hopes of winning a big jackpot, and in fact, many people do win.
So how in the world are casinos still making money if many individuals are winning jackpots?
The answer is that while even though people win jackpots, in the long run, casinos are still profitable because they rake in more money from the people that don’t win.
That is where the term “the house always wins” comes from.
The truth is that casinos are just very rich statisticians. They know that in the long run, they will be the ones making the money–not the gamblers.
Even if Joe Schmoe wins a $100,000 jackpot in a slot machine, the casinos know that there will be hundreds of other gamblers who WON’T win that jackpot and the money will go right back in their pockets.
This is a classic example of how statisticians make money over gamblers. Even though both lose money, the statistician, or casino in this case, knows how to control its losses.
Essentially, this is how risk management works. If you learn how to control your losses, you will have a chance at being profitable.
In the end, forex trading is a numbers game, meaning you have to tilt every little factor in your favor as much as you can.
In casinos, the house edge is sometimes only 5% above that of the player. But that 5% is the difference between being a winner and being a loser.
You want to be the rich statistician and NOT the gambler because, in the long run, you want to “always be the winner.”
Never forget to risk 1% to 2% highest 3% of your Capital on each trade
They simply determine how much they can stomach to lose in a single trade and hit the “trade” button.
There’s a term for this type of investing….it’s called…
GAMBLING!
You are not looking at the long-term return on your investment. Instead, you are only looking for that “jackpot.”
Risk management rules will not only protect you, but they can make you very profitable in the long run. If you don’t believe us, and you think that “gambling” is the way to get rich, then consider this example:
People go to Las Vegas all the time to gamble their money in hopes of winning a big jackpot, and in fact, many people do win.
So how in the world are casinos still making money if many individuals are winning jackpots?
The answer is that while even though people win jackpots, in the long run, casinos are still profitable because they rake in more money from the people that don’t win.
That is where the term “the house always wins” comes from.
The truth is that casinos are just very rich statisticians. They know that in the long run, they will be the ones making the money–not the gamblers.
Even if Joe Schmoe wins a $100,000 jackpot in a slot machine, the casinos know that there will be hundreds of other gamblers who WON’T win that jackpot and the money will go right back in their pockets.
This is a classic example of how statisticians make money over gamblers. Even though both lose money, the statistician, or casino in this case, knows how to control its losses.
Essentially, this is how risk management works. If you learn how to control your losses, you will have a chance at being profitable.
In the end, forex trading is a numbers game, meaning you have to tilt every little factor in your favor as much as you can.
In casinos, the house edge is sometimes only 5% above that of the player. But that 5% is the difference between being a winner and being a loser.
You want to be the rich statistician and NOT the gambler because, in the long run, you want to “always be the winner.”
Never forget to risk 1% to 2% highest 3% of your Capital on each trade
KNOWLEDGE IS EVERYTHING
The next element to ensure success in trading is knowledge. In this case I’m not talking about understanding the basics (although that is part of it). Moreover, I’m referring to knowledge of the markets, current market conditions, news releases that may affect your trades, and in general having a clear understanding of what’s happening right now. Sometimes this knowledge will be a required part of your trading system, and other times it will just be looking at the bigger picture to ensure your trading fits with the current times. If any of this is unclear at this point, it will be soon enough.
YOUR TRADING GAME PLAN
Finally when you clearly understand the three elements we just covered, you’re ready to put everything together to create your trading game plan. This is really your plan for success, and it includes bringing everything together to ensure you have a set of rules, ideas, and tasks that you will consistently follow to ensure that you stay on the road to success.
TRADING SYSTEM
After you have a game plan, and only after, you’re then ready to begin working to discover and test different trading systems. Your trading system is the systematic set of rules that you use to determine when to enter and exit your trades.
There are a couple of things I wanted to point out.
- Your trading system should be secondary to everything else in this book. If you’re clear on trading psychology, using proper money management, and staying current with the markets – you have the most important elements to your success. Your trading system then becomes secondary.
- You should never rely on one trading system. You should work to back test, and use 2 or 3 systems under various market conditions before you ever use them on your live trading account. Doing so will ensure you have something to fall back on when that one stellar system just isn’t working anymore.
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