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Ingredients for Success in Trading

Ingredients for Success in Trading 166.3KB 16 Oct 2012 0:46 AM

Markets are dynamic and ever shifting. Prices in markets are created by market participants driven by fear, greed, hopes, prayers and opinions.  Price on the chart is average sum of everyone’s feeling or opinion about a particular stock, commodity or currency.  Though no two people are alike, humans tend to repeat actions and are creatures of habit. This tendency also gets reflected in market movements in form of repetitive shapes and patterns within price data represented by charts. Thus it makes sense to study price action through use of charts to determine current market trend and to anticipate future market trend. Reliable and profitable method for analyzing the market is technical analysis, i.e., study of price charts. However it is important to understand that technical analysis is not infallible.  Ability of a trader to emotionally adjust to changing market circumstances, awareness of cognitive biases and discipline are keys to success in trading.

How to make money in Trading? Easiest way to succeed is to observe people who are successful and try to cultivate the traits that make them successful.

Some of the key traits of successful traders I have observed over the years are :-

Trading Diary - Most of the successful traders note down techniques employed to discover the trade, how trade was executed, what the desired outcome was and what the eventual outcome was when the trade was closed. Successful trades when revisited give hints on things done right. I believe that most useful lessons in life comes from failures, similarly costly but most useful lessons that a trader can get from markets are by revisiting the unsuccessful trade that made losses. Revisiting the mistakes and pondering over the lesson learned gives trader understanding and awareness of the pitfalls thus enabling him to avoid repeating the same mistake again.


Psychologically Strong - Taking an emotional roller coaster ride of each trade or each trading day is a recipe for physiological burnout and exhaustion.  Successful traders know that daily hits and misses are not important as the average over time. Savvy traders don’t get greedy when the going is good, and don’t get fearful when going gets tough. Remaining objective and avoiding emotional responses in trading markets is essential to surviving in the game. Here I would like to add my personal belief that meditation helps a lot in trading. Meditation helps calm the mind, calmer mind leads to clarity of thoughts, clear thoughts makes way to objective plans and disciplined execution.


Risk Tolerance and Money Management - Trading is not for someone who is risk averse or who hates being proven wrong!  Most successful traders around the world go wrong in markets almost half of the time.  Successful traders understand that key to winning in trading is to lose less when wrong and make more when right.  Great traders respect risk and they manage it efficiently.  Only small amount of capital is risked on each trade, usually 0.50 - 1% of trading capital.  Trade sizes are deliberately kept manageable so that outcome of one particular trade is no big deal, be it win, lose or draw! Traders who remain in the game and make it big in trading in long term are the ones who understand importance of capital in trading and zealously protect their accounts.  Also one of the key aspects noted amongst successful traders is that they only trade with risk capital, i.e., the money they can afford to lose. This is obvious as trading with risk free capital frees up your mind, its lets you trade with your objective plans and helps in maintaining discipline. Scared money never wins, so if you have to meet daily expenses from trading capital, I strongly suggest you avoid trading as chances of success are very slim.


Business Plan and Discipline - Trading is one of the most difficult profession, winning traders have business plans.  They have set of rules and guidelines to help keep their ship sailing in the right direction. Business plan in trading would cover time spend to study  markets and trading, techniques and strategies to focus on, systems to use,  expenses involved, maximum loss per trade, maximum drawdown’s, objectives and goals,  etc. Best traders keep revisiting there business plans and change them when necessary, improving it with each iteration.  Last but not least, the most important trait you would see in all successful traders is discipline. Without discipline no trader could be competent, because knowing in not the same as doing. Competence means that one has progressed beyond knowing what to do, to doing what one knows. Discipline makes trader competent.


If you have these traits than you already have the ingredients to succeed in trading.  If not you can aim to cultivate these traits over time.


Wishing you all a very rewarding journey…