To be a successful trader it is generally believed that you need to excel on three counts:
- Technical analysis
- Trade management
- Trading attitude
When new traders experience setbacks they will often be told it is their mindset which is at fault. Armchair trading psychologist will say they don’t have a winning mentality, they are too greedy, too fearful – any number of negative personality traits which imply they just aren’t born to make it as a trader.
I cannot dispute that this may be the case but attitude doesn’t occur in a vacuum.
It is much easier to have a positive trading perspective if you also have confidence in your analysis and have a structure to your trade management.
Which is why there is a Trading Triad – success in one area is dependant on success in the other two.
Turn a vicious circle into a virtuous one
Learning to trade takes time and constant improvement. A phrase I heard on a seminar many years ago, from the popular business speaker Keith Cunningham, was that rather than “practice to be perfect” we should instead: practice to improve.
Accept that trading demands you continually improve in all areas of the Trading Triad and each step forward in one will help you improve in the other two. Keeping your movement through the triad liquid will enable you to quickly progress as a trader.
There’s no one right place to start as each part is dependent on the others. But a good grounding in technical analysis is something you can undertake which is relatively straightforward.
There are many different characteristics to trading with each producing their own challenges. Technical analysis is the most academically demanding of those – you do have to concentrate to learn this new skill.
As such analysing charts is often considered to be the most time-consuming aspect of trading. Learning how to read price action, chart patterns, candlestick formations and other indicators is like learning a new language and can be daunting – you have to really persevere until finally it clicks into place.
Once you have assimilated this information the next step is to put a system in place to determine your entry points. Using a combination of technical indicators to give these signals is the first step in building a strategy.
TDT Tip: If developing your own strategy it may take several attempts of various indicator combinations to find one that works for you. You should test each combination numerous times to assess its validity. See my article “Is you trade a dud or a dude?” for how to differentiate a good from a bad trade.
How well you manage your trades will determine your profit margin. Cut your losses short and let your winners run is a well known trading adage.
Trade management is the second part to building a strategy.
Again, if you are receiving mentorship or training this should be part of what’s included in your package. You should understand why you are entering a trade and how to manage it. Don’t allow yourself to be bamboozled with techno-jargon. You should understand the strategy, at least in principle.
If you are self-learning then you must build a set of parameters to tell you where your initial stop loss should be, how you will manage a winning trade and what determines an exit from the trade.
TDT Tip: See my article “Risk: Can you handle it?” on how to minimise losses and maximise winners. Mitigating risk is an essential part of trading to improve your bottom line.
Regardless of whether you use someone else’s system or you build your own, you must have confidence in it.
If you are confident with your technical analysis skills then you will understand why you are entering and how you should manage a trade to gain optimum profits. If you are using a third party strategy without understanding it then it will be extremely challenging to stick with it during a period of successive failed trades.
It’s far easier to have a positive mental attitude towards your trading if you have a good strategy in place. You need to have confidence in the system you use and the best way to do this is to understand how and why it works.
There will still be some psycho-gremlins to work on, however. Trading, for the vast majority of people, is a completely different way of thinking. Success in other professions is no guarantee of success in trading.
Most people with a higher education (a degree or professional qualification) tend to find technical analysis the easiest aspect of the triad to master. They are used to dealing with multiple data streams and looking for patterns or connections. However, technical analysis is also a visual art, so many people with a more practical persuasion also find this quite straightforward to understand.
Issues arise with the sheer volume of indicators that have been created and developed over the years. While software is invaluable in helping us with our analysis it can result in information-overload.
Concentrating on the bigger picture is essential to trading – those new to trading tend to get bogged down in the small details. They will try too hard to identify chart/candlestick patterns to the extent that they will sometimes see things which aren’t actually there.
The best advice I can offer here and do to all our Dynamic Trader members is to keep it simple. Don’t rely on an indicator which is too complex for you to understand. And stick to chart/candlestick patterns that jump off the page at you – don’t go looking for them.
TDT Tip: See my article “Are your charts lit up like a Christmas tree?” for keeping your analysis simple.
Trade management is often the most difficult to master. Anyone can enter and exit a trade, but how to get the most profit from a move is a lot more tricky.
It’s surprising how often we, subconsciously or otherwise, look for confirmation from others when making decisions. In fact, the best leaders are those that most accurately anticipate popular demand.
The markets don’t give us the same clues as to what is going to happen next. We only have probabilities from previous events. To some extent we can dip our toe in – to test the water – by entering with a small position. This helps build confidence, rather than going ‘all-in’ on a ‘sure thing’.
As price goes in our favour we can steadily increase our stake. Again, this builds confidence and takes away the necessity of having to be right from the get-go. This can be quite a new concept to many people, especially the more ambitious among us who are attracted to trading. Slow-and-steady wins the day in trading so these personality types will find this aspect of trading easier. However, these same people can be a little less decisive so actually entering the trade in the first place may be a challenge!
Everyone has to make a psychological adjustment when they start trading. It shouldn’t have to be a big shift, just be prepared to accept you can’t always be right, that you need to learn and that you will need to modify your thinking.
We all get into trading for the money. It sounds like a relatively simple and time-efficient way of making some extra cash and improving our lifestyles.
But trading has different ideas. It only wants the very best – the smartest, the most efficient, and the most devout – to succeed.
Only the very few can claim to be the very best at all three components of the Trading Triad. And that’s okay – because most people abandon trading without ever realising that to just be good at these three aspects of trading is enough to become an extremely successful trader.
There will always be one area at which you excel. But through practice and hard work you can easily become above-average in the other two. And this, in turn, will produce extraordinary results.