Recently, a viewer from our YouTube channel asked the question;
“What are The 5 Key Points Every Trader Needs To Know?”
And immediately, my mind went to what the great Albert Einstein once said, “Everything should be made as simple as possible, but not simpler”.
To me, simple is best.
However, we must make sure that we don’t simplify too much and do away with some important aspects of trading.
The following five aspects of trading are what I believe are the foundations of all trading success.
Combine all five, and your trading success is almost guaranteed.
The 5 Key Points Every Trader needs To Know
1. You must have the right Trading Psychology, Mindset and Personality
So, just how important is psychology in trading?
According to Dr. Van Tharp of Trade Your Way to Financial Freedom, very important. He estimates that trading is around 90% psychology and the rest systems.
Also your personality must fit your trading style.
Like so many new traders do, you can attend weekend seminars and try to learn the trading style of a specific guru, but if that guru’s style isn’t a good match for your personality, you will lose money.
Trying to adopt a trading style based upon someone else’s personality, doesn’t work in the long term.
I made that mistake when I first started out too.
2. Ensure Risk Management is in Place
How exactly do you to manage risk?
The key is to view your portfolio as a whole. Don’t focus on an individual position and then risk way to much on a single idea.
3. Position Sizing
Portfolio risk invariably leads to position sizing risk.
It may be fine for accounts that are very small, but for larger accounts you should limit your risk to 2% at most.
Depending on market risk, I generally don’t risk more than between 0.1% to 1.25%.
So far, less than 2% on even my best ideas at any point in time.
Many have told me that this is too little since the return won’t amount to much, but when opportunities come, they are usually plentiful and when you combine all of those terrific trades, returns will be significant and the risk minimal.
4. Have a Great Trading System
Psychology and mindset and even risk management amounts to nothing if you have either taken onboard or developed your own trading system that has a negative expectancy (i.e. loses money on average over a string of trades in the long-term).
So what do I mean by that?
Simply put, it just means that even if you execute every trade perfectly, when you make a large number of trades, over time your system will lose money because your system has no advantage.
That’s why you need to find or create a trading system that not only suits your personality, but one that has a positive edge.
5. Make sure The Market is Safe to Trade
Don’t focus on just the trade.
Take the time to assess the market and based upon your assessment, decide if you should even be participating in the first place.
Remember, there is absolutely nothing wrong with taking a step back and not doing any trading for a while.
Wait it out.
The market will eventually become a safer environment where your trading system will lead you to greater success.
When you combine these five key elements of trading, your trading will rise to the level of a professional hedge fund manager.
This is how I operate every day and hope to inspire you to do the same.