If you want to be a winner trading in the long run there are THREE elements of trading that you must have in place. If you do these three things you can not lose in the long term, if you are missing one you will likely not last very long as an active trader. These three simple things work together to keep you profitable in the markets.
A Robust Methodology
#1 You must trade a WINNING trading method: Your trading system must be valid and profitable through past markets. The best way to win in the markets is to have a method that identifies potential trends and gives you entries and exits that put the probabilities on your side for winning trades. Many times these systems will have huge winners that pay for all the small losses and make you profitable. Regardless of time frame the primary thing all traders are in search of for profitability is trend capture. The key is to go through historical price data and see how your method would have performed in different types of past markets, bull, bear, and sideways. Along with some outlier times like October 1987 and the Fall of 2008. A winning system either has to have a few wins so big that it pays for all the small losses or a very large winning percentage that keeps the few losses from getting out of hand. Find your edge and learn how to make it a profitable one. If you have no edge and no winning system your trading account will be eaten away bit by bit. The market has an edge over you, it is counter intuitive and slippage and commission are drooling to start chewing on your account.
Risk Management
#2 You must manage RISK: Even with a winning system betting too big on one single trade can ruin you quickly when not if it goes wrong. Betting even 10% or more of your capital on any one trade can ruin your account with 5 straight losses. To really succeed you have to lower your risk to no more than 1% of total trading capital, this does not mean to trade with 1% of your capital or with a 1% drop of your asset that would be foolish it means to set stop losses and position size carefully so that if you are wrong you will only lose 1% of your account. Even if a real disaster happens and your stops are gapped through you may still only lose 2%. This is how traders survive for the long term through losing periods. A $50,000 account=$500 maximum loss per trade. Many traders use 2% risk of trading capital per trade but they need higher win percentages are will suffer from bigger draw downs. The reason that risk management is so important is that with a high enough risk of capital per trade you eventually end up with a 100% chance of ruin at some point through a unexpected low probability event that causes an out sized move or a string of losses in a very volatile trading environment that were unexpected. The key is the trader must get from their first trade safely through to the returns they are looking for with out going to zero capital before they get there. Many professional money managers, firms, and traders learn this lesson the hard way. With out the proper risk management traders eventually end up with an account of $0 or worse they owe their brokers money.
Psychology
#3 You have to have the right MIND SET. To win in trading you must have faith in yourself, your system, and your method. If you are a trend follower you must believe that trend following is the most profitable way to trade, you must believe that your system is a winner because of the back testing you have done on price history or charts based on your rules. You must have faith in yourself to do the right things and remain disciplined. If you lose money you must understand that it is just part of the game and that you will make it back eventually. Only stress management, perseverance, faith, hope, passion, and a goal orientation can really take a trader from the trading starting line to successful trading. Trading just for the money doesn’t work, because they first five years the money is not worth it in almost all instances and the new trader quits.
If you have these three things, nothing can stop you, if you are missing any of these three things nothing can help you.