People are always looking for the “Holy Grail” of trading and generally only focus on finding a great system. I contend, however, that success has less to do with the system a trader uses and more to do with the implementation and consistent application of good trading habits. In fact, there are many good systems that a trader can use depending on what type of trader you are, long-term, short-term, etc. (remember, no perfect system exists). A few important key elements, if incorporated into our trading routines, can make all the difference between being an effective and successful trader, or being a failure and quitting after all our money is gone or simple quitting out of frustration. If we can start to be successful by implementing the following habits then that success can build on itself. In the world of money and investing we call this compounding. Here are 3 keys that if you develop into your trading plan, will help your trading to become more effective and more profitable:
Use Strict Risk Management: Only risk 1-2% per trade. The reason is simple; at some point in time it is a statistical possibility that you could have 5-10 losers in a row. It might not be this month or year, but over a 10 year period of time you could have 10 losing trades in a row. If you risked 5% per trade you would be down 50%. To make that up you would then have to make 100%. Risking only 1-2% puts you at a 10-20% loss with 10 losers in a row. That type of loss can be made back in 1-3 good trades. Always use an initial stop loss order that reduces your initial exposure to the 1-2% max loss. Once the trade moves in your favor you can move your initial stop loss to your entry point or break-even point and effectively reduce your risk on that trade to zero. You can then use a trailing stop to start to protect profits as the trade move more in your favor.
Use proper position sizing: There is more to money management than just using stops or not having too many trades on at once. Those are only the basics. Professional traders do all that, but also use position sizing. Let me reiterate that you should always trade with a stop loss in place to limit your losses. Most people use a percentage risk stop and that is usually not the best level to place your stop. The best stops loss levels are based on the chart using a recent significant high or low level. If you only use only a percentage you may place your stop to tight or to wide for the current market conditions. With the correct stop in place you can then calculate the proper position size for your trade. That is the best way to keep your risk per trade at the proper 1-2% risk level.
Trade with the trend: Trading with the trend is actually simpler and so much easier than other strategies. Generally speaking, simpler is also easier to implement and easier to follow. The key is to have a system that just goes for the middle of the trend. The reason is because; again it’s hard to pick the top and bottom (impossible to do on a consistent basis). The key is to follow the market not force the market. Traders must to be patient with what the market gives us and it is important to not try to “make things happen,” which is the surest way to failure and frustration. Use a system that identifies and follows the trend so that you can “jump on that trend and ride it. Trying to trade against the trend may cause you to overtrade and potentially lose when the trend “catches up” with you.
These 3 simple keys are not complex or difficult to understand, but are sometimes difficult to implement. If they are consistently followed and implemented into your trading routine and trading plan, they can give you a much higher probability of success and lead to a much lower stress higher probability to trading success.
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