Trading is tough.
There is much to learn with a lot of noise out there.
But what if you could skip the fluff and focus on what really matters?
Through the power of the internet, I’ve asked 7 successful traders What is the #1 thing that is absolutely critical to a trader ‘s success?
Here’s what they said.. (with zero mention of technical indicators or fundamental analysis)
I think more than anything it has to be discipline. Because as important as finding a suitable methodology, developing a strategy, sound risk management, and position sizing is, it will be for nothing if you don’t have the discipline to consistently execute it and follow your rules.
Discipline is an integral part of all trading, whether systematic or discretionary, day trading or buy-and-hold, across all asset classes. I don’t believe you can be consistently successful without it.
The #1 thing that is absolutely critical is risk control. Risk control based on risk per trade, risk control based on sector, risk control based on total portfolio.
You must know how much you can lose on a given trade and the maximum loss of your entire portfolio at any one time. Only then can you take the necessary measures to manage these risks.
Almost equally important is correct trading psychology. Being able to accept trades that do not work. Staying focused and strong in the complete uncertainty of trading.
Because even the best trading system will have losing periods and this is when you need to remain disciplined and continue executing your trades.
A trader must have many different ingredients to be successful in trading, but what is absolutely critical is that you must love the type of trading you do.
Many people think they have a passion for trading but the reality of trading; watching charts, managing risk all day is not as exciting as many believe. If you are a day trader then you must actively enjoy this process.
If not, you must find another form of trading (or profession) that suits your style. That might be swing trading, automated trading, systems trading, whatever. But what you must have is passion!
A growth mindset is the number one thing critical for a trader’s success.
I highly recommend the book, Mindset, by Carol Dweck, as an important read for traders/investors.
Trading edges come and go. The sustaining trader learns every day so they can adapt when edges change. The elite trader maximizes their edge by trading it bigger and more often.
There is no destination for the trader. There is just the perpetual quest to become your best trader and that requires embracing a growth mindset.
Controlling your own mindset is the most important. Why is this?
Because it is your mindset that controls everything else you do, in terms of trade selection, position size, risk management, when to enter and exit etc.
You may have a written trading plan that sets these things out, and that plan may well have been written objectively with a clear mind. You may even have back-tested or paper traded the method, with good results.
However, once you start trading with real money on the line, this is when controlling your mind comes into play. The mind can make you make irrational or emotive decisions, such as:
Override your stops;
Getting impatient and taking impulsive trades that do not meet your criteria;
Taking on revenge trades to make back money lost;
Override your risk control parameters, either on an individual trade or portfolio basis (the concept of portfolio heat)
In those instances, the carefully constructive trading plan is thrown out of the window.
Traders who have been successful over a long period of time know this, and resolves to eliminate these issues as far as possible.
Trend following brings it own issues – the basic premise is to cut losses and let profits run. And, as we have seen in trends such as crude oil, or EUR/USD over the last few months, no-one knows how big those trends can become.
There are no profit targets used, as these could limit your gains on a trade. So let’s split that down:
Cutting losses – a trader can have a solid trading plan, which includes his stop methodology. Yet a lot of traders think they can out-smart the market. An experienced trend follower will know that he will lose on the majority of his trades, so it is imperative that those losses are kept as small as possible.
Letting profits run – as your winning trades will come along less frequent that your losing trades, you need to capitalize when they do materialize. Therefore, your winning trades have to be bigger compared to your losing trades (in terms of R). You HAVE to let winning trades run, in order to achieve the positive expectancy that a solid trend following approach can give you.
Particularly after having a run of losing trades, a trader may get into a profitable position, and will close the trade for a small gain, for fear of the trade reversing and turning into another losing position. This is fatal for a trend follower.
Say you have gone short on crude oil a few months back, after having a run of say 10 losing trades. You went short at $90, and then closed the trade out when price was at $85. You would have felt good at that point, but I dare say you wouldn’t have felt so good when price then fell to $50, and your method would have kept you in the trade the whole way down..
That single trade would have covered a whole bunch of losses and made your year, and the fact that you didn’t profit from that trend was purely as a result of a lack of mind control.
So, once you have a basic method that demonstrates a positive expectancy (be it trend following or any other approach) with good risk control, then from that point it comes down 100% to controlling your mindset.
Risk management is the most overlooked area for the vast majority of traders. Risking too much and trading too big will lead to failure every time.
Never lose more than 1% of your total trading capital on a single trade. Have an appropriate position size, so you can cut your loss when proven wrong, for a small loss.
There are so many things you need to be successful in trading and if you don’t have all of them you are likely to struggle.
My initial thought was “Journaling” because keeping a record of what you did and how it worked is vital in understanding your strategy, where you are going wrong and how you can improve.
But the fact of the matter is that simply keeping a journal doesn’t mean that one will take the time to study it, to actively learn from it and even if they do, it doesn’t mean they will have the discipline to act on what they find.
I know many traders that know the root cause of their problem – e.g. lack of patience. Many of them have cast iron evidence of this from reviewing trades and yet they simply do nothing about it.
So, I then started to think that the number #1 thing is commitment. To learn, grow, and be the best at what you do. Commitment requires a catalyst though – it requires ambition. And once you have commitment you also need discipline.
So now we come to that old chestnut, discipline. The problem here is that the word “discipline” – which is bandied around left right and center in the trading arena – is incredibly broad!
There are a myriad of different things you need to be disciplined about. You have to be disciplined to put the hard work in, to study yourself, your strategy, to learn from it and constantly grow. You then have to be disciplined to be patient, to wait for your setups, so that you can execute flawlessly.
You have to be disciplined to control your risk, you have to be disciplined to push yourself when the going gets tough and many more. Bottom line: Being disciplined in some areas and not others doesn’t work.
You can study yourself and your strategy all day long, if you risk too much its going to end badly at some stage. At the same time if you keep your risk low but you execute badly, you will just bleed money. And so it goes on.
The word discipline is probably the best way to answer your question. But invariably when you say that, the reader will roll their eyes and move on because the word on its own says everything and nothing, plus they’ve heard it all before.
In essence, the #1 thing that is absolutely critical to a trader’s success are risk management, psychology, passion and discipline.
So, what do you think is absolutely critical to a trader’s success?
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