What does a trader need for success in trading?

Analytical skills, Trading strategy, Trading Discipline and Money Management in trading?

Introduction

[ Quick summary explaining what the blog post will cover ]

1. Analytical skills, and a Trading Strategy

2. Trading Discipline and Money Management

3. The importance of a Stop loss

I personally believe that there are three things which affect trading success:

1. Analytical skills, and a trading strategy, To find -- what to buy and when to buy.

2. Trading Discipline and Money Management:

Every trader in the market place has just one objective to make money. However very few people are able to consistently make money in the market.

When markets are rising, it seems easy to make money. However when they are trending down, they take away most of the profit or capital of many, if not most, individuals.

Trading is a tough game with many traps. If a trader is not watching himself, his actions, his behavior or his emotions, He is likely to fall into some of these traps. To avoid such falls, it's imperative to be rational in trading decisions and to control emotions.

This seems easy but as a matter of fact, emotions like greed, fear, hope, over confidence, regret, etc., are very difficult to manage. If there is a trading position with profit, should it be held a little longer or should it be closed to book profit? If a trade is going into loss, should one wait for the prices to recover or cut the losses? Such decisions are tough to make without getting emotional. To be rational, and free our mind from emotions, is a tough job.

So how should a trader trade stocks then?

He should constantly strive for trading discipline; and, trading discipline can be achieved with strict money management rules. Every prospective trader should lay down a framework of policies and rules by creating a formal, well-defined trading plan. The plan should contain trading objectives and trading rules/guidelines based on one’s financial situation, trading objectives and risk preferences.

There should be rules or guidelines about how much fund to commit to trading, how to identify stocks for trading, how much fund to commit to each trade, when to close a position, how to control risk in trading and how to monitor trading progress. Such rules should be strictly adhered to. This can save a trader from taking large positions at high prices which seem to ruin most of the investors when market stages sudden reversals.

The importance of a Stop loss

All good methodologies use stops. A protective stop loss is an order to exit a long or short position when prices move against you to specified price.

The stop loss insures against a usually large loss and has to be used in one way or another.

An initial stop loss can be placed with your order on the trading platform; the trade will be closed, automatically when if the stop loss is hit.

This type of stop loss will allow you to execute your trade and go spend time with your family or friends, this will help you to trade out of your emotion, because you know how much money you will lose if the market didn’t go in your direction.

Lot of traders use mental stops, when they enter a trade, they don’t place a stop loss, because they think that the broker will hit their stop loss which is not true.

The reason behind using mental stop is the human psychology, humans hate to lose money. And if you don’t accept losing money as a part of the game, you will never make money in the market.

Don’t never think of using mental stops, because you can’t control the market, you can’t be sure that the market will do this or that.

Before you enter a trade, calculate how much you may win, and how much you may lose. Place your stop loss order. And your profit target. And forget about your trade.

Don’t ever risk money that you can’t afford to lose 

I got lot of questions from traders asking me about how much money they need to start trading. First of all, you have to take trading as a business. You can make money in this business and you can lose it as well.

The amount of money that you need to start trading depends on the amount of money that you can afford to lose. Don’t ever borrow money or risk big amounts of money that you can’t afford to lose.

Because trading is all about emotions, if you trade and you are afraid to lose your trading account, you will fail in this business.

Because you will be controlled by your emotion, and this will affect your trading decisions.

You will not be able to follow your trading strategy, and you will certainly fail.

The best thing to do is to start small, try to get as much experience as you can, and build slowly your trading account. This is how successful traders become successful.