Tools Required to be a Successful Trader:

Trying to make money from the financial markets for a novice trader is a hazardous business. Not only does the novice trader not know what he is really getting into, he doesn’t have the slightest clue of the pitfalls that lie in wait for him. Exhilarated after hearing of a friend who made a few thousand buying stocks, the would-be trader jumps in, head first, into the vortex that is the financial market. After all, how hard could it be…?

The market gyrates, dives, stalls, rises, leaving the novice trader in an emotional tailspin and at his wit’s end. Having no clue as to what he is doing the neophyte trader is bewildered and frustrated as he loses copious amounts of money to the market. If he doesn’t pack it in, he realizes the sheer amount of learning he needs to do. He gets serious, he buys every book that is recommended by other traders, he watches countless hours of videos online and spends sleepless hours on forums. He starts trading again, this time with the acquired knowledge of trading very small. It takes him years but he learns the value of patience and discipline and accepts the nature of the market. After devouring countless books and trying every strategy he reads about, the trader finally finds a method of his own that sometimes works. He sticks to his method and he tries to improve it. He finally realizes he needs a Statistical Edge in the market and Rules to deploy that edge. He realizes the importance of emotional control and the role of discipline. After years of improving his method and learning his lessons he finally learns how to make money from the market. He now has the required years of experience and more importantly a Statistical Edge, Rules and a Trading Mindset. He goes on to teach others of his experience:

Edge: You need to develop a Statistical Edge in the market. An Edge is a high probability signal that you recognize that makes you put on a trade. Having a positive expectancy Edge is the first and most important aspect of your trading business. An Edge is a rifle for a hunter, a parachute for a person jumping out of an airplane, an oxygen tank for the deep sea diver. Without an Edge your task cannot be done and moreover can be fatal. Thus the novice trader must spend however long it takes – for most hundreds of hours to develop an Edge in the market. This is a process of testing what works in the market and building confidence around the signal one develops to enter the trade. This is an Edge. If you do not have a legitimate Edge that you developed yourself, that you completely trust before you start trading then you are doomed from the very beginning.

Rules: You need to develop rules to deploy that Edge in the market. Rules such as: how much capital will you expose on a trade? When will you exit the trade when the trade goes against you? Where will you take profits if the trade should go for you? These rules need to be adhered to with an iron will in a speculative environment like the financial markets. These rules are there to protect your account. Everyone has heard that you must be disciplined to be a trader – this is what they are referring to: the discipline to follow these rules.

Psychology: Why does your mind start racing the moment you enter a trade? Why does fear overwhelm you? Why are you fixated on the dollar made or dollar lost on the screen in front of you? Why do you feel the need to constantly check your account to see how your trade is doing? Why do you feel euphoric after a win and terrible after a loss?… Amateur one, you have not worked on your psychology. You do not even know what it is. This is the most difficult aspect of trading to overcome, and it will take you years of full time trading to come to terms with your own mind. Your mind will be the greatest hurdle in you making it as a profitable trader. The human mind cannot handle uncertainty, it cannot handle fear – the human mind evolved to keep us safe, to keep us secure, you will have to unlearn centuries of evolution of the human mind to come to terms with how your mind works in an unstructured environment like the financial markets. That is why developing and trusting your Edge and Rules is important so it overrides the emotional decisions your mind is screaming at you to make.

You need to bring all 3 – Edge, Rules, Psychology – together to become a successful profitable trader. How does one do that? This is how: You have to wait patiently for your Edge to appear in the market. You cannot put on a trade until you see your Edge appear, any trade you put on a whim is a random trade outside of your tested method and is detrimental to you as a trader even if the random trade should win. Because you have just broken your own rules and you cannot function in an unstructured environment like the market without rules you are shooting yourself in the foot with every random trade you take. Only take trades when your Edge appears, over the thousands of trades you take in your career your mind will be fortified to only execute normally when you do this. 

Once you enter a trade make sure you follow your pre-determined rules, these rules should be embedded in your mind and you should be able to abide by them automatically. The rules will keep you from making emotional decisions. The rules will inform you to get out of your losers with a small loss and your rules will allow you to let your winners run and exit the trade. Follow your rules, it is the only structure you have in an unstructured environment. 

Finally, the market is not out to get you, the market is not sentient, it does not know you exist. It does not know when you are taking profits or when you are taking a loss, so why do so many traders become completely weak kneed and consumed with fear when in a trade? It’s because the human mind cannot operate in an uncertain environment, the human mind becomes frazzled when operating in unknown conditions. How many times have you been shaken out of a trade and the moment you exited, the market reversed and went the way you originally thought it would? Stick to your rules, stick to your discipline that is the only way to override your feeble mind.

Trading is a business of probabilities, any trade you put on can be a winner or a loser, do not bet a large amount of your capital in any one trade, the market could go anywhere. Take it one trade at a time and build your confidence and your equity. The market is not going anywhere, it will always be here, take the time to learn the skills.