Most of you might think that trading is all about identifying a profitable strategy and then using it to make money . Sure does sound simple, but the question is if it was that simple then why only less than 10% of the traders make money and more than 90% of them end up losing money in the same markets. Any thoughts?
As I perceive, Trading is not just about finding a profitable strategy. Trading has a lot to do with the trader’s personality, which means it is completely up to the trader how he perceives trading . Some of you might think that through Trading, you can make a huge amount of money in a short period of time. In that case you are considering Trading as Gambling. Some of us think that Trading is all about manipulations and ultimately designed in a way that you end up losing all of your hard-earned money and then go on to assume that Trading is a huge Risk.
This can be explained quoting a very famous quote by the legendary trader Ed Seykota;
TRADING, as per my experience, is a combination of the three very important aspects, also what I call The Three Strong pillars of Trading.
They are as follows:
Strategy: Strategy is basically a system or a framework which has defined rules in regards to Trading. A strategy should give us an entry as well as an exit from the market. Also, it should have very specific rules to define a setup. A strategy can be easily created through the study of Technical Analysis concepts.
Risk Management: Risk Management is where the numbers come into the picture. Traders must know how much they are risking in order to earn good returns. Risk Management includes right volume, accuracy, risk to reward, etc. risk management is one of the most important aspects of trading, and if ignored will lead to disastrous consequences. Stoploss is the most important player in risk management.
Psychology: As humans, we are highly emotional beings and thus psychology of the trader plays a very important role to make consistent money from the markets. The psychology factor can only be understood better when it is experienced in the live markets, by investing your hard-earned money. How you react to a situation when you are losing money or making money, defines your psychology.
All the above aspects of trading have been explained very briefly but they are the most significant topics. Each of these topics will be covered individually in my upcoming blogs as we progress.
As of now, I wish to explain the significance of each of these aspects of trading because there is a huge misconception regarding the same.
Let’s go back to the beginning of this blog, as to how most of us think that trading is all about having a strategy that is profitable but in all honesty, that has the least weightage, out of all the three aspects of trading. The weightage that I assign as per my experience are as follows:
Strategy (20%): The aspect that everyone runs behind the most, having a misconception that if you have a perfect strategy, it will make you money. But honestly, any simple strategy which has specific rules and follows proper technical analysis can help you make money. Provided we follow it religiously. The only possible scenario in which you could fail in this aspect is when you involve your emotions in it, and ignore the rules of the strategy. So the bottom line is that, it’s not the strategy , but how you trade that strategy with discipline that will give you the results.
Risk Management (35%): An aspect which most of the traders ignore. You should always know how much you can lose or make before entering the trade. But most of the traders think about all this after taking the trade or when the damage is already done which leads the trade to run in losses. Volume and stop-loss plays a major role in curbing risk. Without Risk management, it is impossible to make money consistently over the long run and hence the weightage .
Psychology (45%): of a trader plays the most important role in deciding whether or not you can be a consistent profitable trader. Though it’s a very detailed topic to talk about, it all boils down to one thing that controls you , EMOTIONS. Emotions include controlling Greed and avoiding Fear. This statement is very simple yet powerful, I dive deeper into this in my upcoming blogs.
There are many amateur traders who make substantial amounts of money in a demo account but when they trade on a live account, exactly the opposite happens. Why do you think this is so? The only difference in the live accounts is that the real hard-earned money is involved and in the demo account it's virtual money. Whenever real MONEY is involved, emotions come into play and in turn our psychology tends to get affected. This is the real challenge in the GAME OF TRADING...
This is exactly why I believe strategy, risk management and psychology are the three pillars of trading... It’s simply not possible to Trade and make money if any one of these pillars is missing...