You can read trading books until you are red-eyed and suffering from information overload. You can spend thousands of dollars on trading seminars, and you can waste a lot of time trying to get successful traders to give you the secret sauce. But in the end, it is simply you versus the markets. You have to pick your system, your risk tolerance, and take the heat in your own account. It only becomes relevant when it is your money you lose. Asking a successful trader to tell you how to trade is like asking a lawyer how to practice law. Trading is a profession like any other, and your profits will be the result of many years of focused work, perseverance, and diligence.
No one can tell you the right system and method for you. If you can take draw downs in equity mixed with long term capital growth, then trend following may be for you. If you love investing in the hottest stocks over longer periods of time, then CAN-SLIM or the Darvas System may be the right system for you. If you have little patience and love action, then you can join the few who have mastered day trading. Your choice depends on what you are passionate about, and what gives you a level of stress that you can handle.
What all winning traders must have, regardless of timeframe and system are as follows:
Trading System
- They trade a robust system or method that wins more money over time than it loses.
- Their system gives them a reward to risk ratio that is in their favor.
- Their system or method is proven to work with a live trading record over many markets, trades, or has historical back testing.
Trading with Managed Risk
- They manage the risk of ruin to avoid blowing up their account.
- They risk no more than 1%-2% of total account equity on any one trade.
- They manage risk through proper position size so they do not risk their account and their ability to trade in the future.
- They do not risk more than 6%-12% of their capital at one time, across multiple trades.
The Mind of the Trader
- They have faith in their system or method and continue to trade it, even when they are losing, so they capture the wins when they start again.
- Almost all winning traders have come back from blowing up their accounts or losing a lot of money. These traders persevered while many others quit before they won.
- Most winning traders have learned to separate their trading from their self-worth and ego. They treat trading like a business.
With these three elements incorporated into a good trading plan, you will eventually win big. If you are missing any one of these three elements, the odds are against you.