Trading is a three-dimensional competition that requires the management of three continuous, simultaneous, endurance disciplines. While a variety of trading methodologies and systems exist, profitable trading involves management of the trader’s psychology, attention to risk control, and dedication to trading a robust system over an extended time period.
Many traders make the mistake of thinking that simply knowing the right methodology will guarantee their success. In actuality, it is a three event marathon consisting of more than just entries; psychology and risk management have much more influence over longterm success. Entries have no meaning without the right exits, and no system is a winning system without the discipline to follow it.
Here are the three events in the trading race:
A trader’s psychology has to be one of confidence in order to trade it with discipline. Confidence comes from doing homework, back testing, chart studies, and experience. A trader has to trade position sizes that turn down the volume on their emotions. They must have the mental discipline to follow the plan that they carefully crafted when the market was closed, when the market is open. When a trader drifts into greed, fear, and ego, they will likely wreck on the rocks of reality. A successful trader needs the psychology of an entrepreneur, cultivating the fortitude to get through the small losses so they can make it to the big wins.
A trader’s risk management will determine their short term and long term success. Trade too big and the trader will give back all past profits with just a few losing trades. Trading huge position sizes insures that a trader will eventually give their whole trading account away to disciplined risk managers. If risk is not managed, no trading method will lead to profitability because some string of losses will eventually be too much to bear.
A trader’s methodology should be robust enough to have an edge over the markets and other traders. High probability entries and set ups based on historical price action is a good place to start. Planned exits to lock in profitable trades when right, and knowing where to get out if proven wrong, is critical to success. A good trading methodology is trading with a plan that defines entries, exits, and position sizing. Implementing a strong methodology increases the likelihood that a trader’s overall wins will exceed their overall losses within the time frame for expected profitability.
If you want to win the trading race, you must train for all three events.