Foundational Principles of Successful Trading
Want to greatly increase your chances of succeeding as a trader? Let’s review then some of the fundamental principles that successful traders have in common. If you can learn & practice these principles you will greatly increase your chances of long-term success, fail to learn and practice them and you greatly increase your chances of near-term failure… which will you choose?
We go deeper into each one of these topics in our educational modules, and they are repeated in different ways to reinforce learning, so here we want to just try and give some important brief summaries.
First of all, keep in mind that even though these may seem like basic principles, they are not necessarily easy to follow consistently. In fact, even the most successful traders at times fail to keep them… what is important is that they get back on track quickly. So keep a learning attitude, and try and continue to reinforce the good trading habits that lead to success.
Common Trading Mistakes
Let’s start by quickly mentioning a few of the most common mistakes that greatly increase the chances of losing most (or all) of your trading capital, often in a short amount of time. A few of the most common errors are over-trading, risking too much, unrealistic expectations, and not consistently following a clear set of trading guidelines.
All these mistakes have to do with the one thing you can control while participating in the market… yourself. The most common mistakes have nothing to do with the market, but have everything to do with your thinking. The errors come from losing control and trading emotionally without clear rational. So immediately start learning to trade with consistency and try to leave irrational behavior at the door.
With all that said, one important principle to always keep in mind is this:
YOU MUST CONTAIN YOUR LOSSES.
This of course does not imply you should be afraid to take losses, you just must contain them. In fact successful traders take small losses regularly, however they have learned to keep them small while retaining consistency in their trading. So learn to accept losses without too much emotion, just contain them by keeping strict risk management this will help ensure you are in the game when opportunities arise.
Learn to Think Like a Successful Trader
One of the first foundational principles is to start learning more about trading psychology, learn how to think how successful traders think. This is probably one of the hardest principles to convey in words because the ideas are often counter intuitive and cannot simply be followed like a checklist but must be learned from practice in real time.
Two of the most common emotions encountered in trading are fear and greed. They both are detrimental to your trading account. However with prudent risk management and right thinking these emotions can largely be overcome. Learning to manage your emotions will give you an important edge on the market, because many traders are trading emotionally and giving away their money to more disciplined & patient traders.
This is one reason we stress the idea to “keep it simple”, by keeping your approach simple it is much easier to control yourself and to trade with consistency. Most traders do not fail because of small losses, they fail because they lose control of themselves and overtrade & over-leverage which leads to a string of very large losses.
You need to find a way to trade with confidence and without fear. This certainly does not mean trading recklessly. It just means don’t be afraid to take a loss and if their is a good opportunity within your trading plan, then relax and take the trade.
However you can only trade without fear if you trust yourself to cut your losses short and to accept that taking small losses is part of the trading business, small losses should not shake your confidence if you executed the the trade well.
An immediate thing you can do is to keep your risk % consistent on every trade, and start by risking 1/2% the amount you think you can tolerate. This will allows you to trade with much less emotion which only clouds judgment… once you are into profit and using the markets money, you can choose to slightly scale up your risk level. However until then, start with less risk not more.
Another principle of trading psychology is to take responsibility for your own trades. You can use other peoples analysis or adopt your own, however ultimately you are responsible for your own trades.
This means you don’t blame your mistakes on the market, your broker, or others. If you make a mistake in trading then take it on the chin and learn from it. In fact this is one of the most useful things about taking losses, they provide feedback and a way to learn. If you keep your losses small, their will always be new opportunities to improve and learn.
Maintain Your Focus on Capital Preservation
A focus on capital preservation and risk management should always be on your mind. Notice we don’t emphasize capital growth, instead we first and foremost focus on preserving our trading capital. We retain a positive expectation that if we trade well the profits will take care of themselves.
Of course, depending on your own risk toleration level, you will need to accept a certain level of drawdown. Drawdown is part of the trading business and should be expected, just keep it within your predetermined level and scale down your risk % if necessary. For example, maybe you make a rule to scale down your risk per trade by 1/2 if you reach a 15% drawdown level.
If you have these rules in place beforehand, and trade with less risk then you think you can tolerate, then it helps you to trade without fear or too much emotion. Too high of leverage will greatly increases your chances of trading with too much emotion causing you to trade irrationally.
Also a focus on capital preservation and on containing your losses allows you to be in the market when favorable conditions arise… often it only takes a few trades to make up for a number of losing trades, but you must preserve your capital to take advantage of the move!
Trade With Consistency & Patience
Much of trading is about trading with consistency and patience. Successful traders trade with an almost robotic consistency. They have an approach and they consistently follow their guidelines day after day, they also keep a learning attitude and look for ways to refine their approach while keeping things simple.
Also good traders are patient traders. Much of the time the market will not be trending or will be in a consolidation, during these times it is more common to take losses. Successful traders stay consistent during these times and they don’t get impatient, they know that favorable opportunities will come if they stay in the game.
Impatience will only cause you to take low quality trades. Be patient for good setups… if you don’t get the pull-back you wanted or the break-out, then just wait and look for the next opportunity.
Think In Terms of Probabilities
In the forex market we are dealing with an unknown future, so it is important to think in terms of probabilities not prediction. Trading is not about “being right” but about trading & executing well. Feeling attached to “being right” in is dangerous, you will have a much harder time cutting your losses short and losses will be emotionally difficult.
Every time you enter an order, you must keep in mind that it will possibly be a winner, but there is also a good chance it will be a loser. In fact, depending on your trading strategy, there often will be an equal probability that it will be a loser. So don’t take losses personally, especially if you executed well.
You only need a small edge to profit over time, so focus on probability in your setups and let your winners run. With patience & discipline probability will allow you to trade with a long-term edge.
Maintain a Long-term Outlook
The last principle to mention in this introduction, is to think about the long-term when trading. If you can practice the important principles of risk-management, trading psychology, and be disciplined… then you have a very good chance of succeeding as a trader.
You will have some ups and downs, however you will be able to remain much more relaxed and will just keep becoming a better trader, but you must always keep an eye on risk & on preserving your trading capital. The longer you are in the market the better chances you have of success.
In topic 6 within Module 1 we look at some examples of compounding your account over-time, you will see that it is much more realistic and much less risky to keep a long-term perspective. With the power of compound interest and time, an account can be grown from almost any size… but you must not lose your account and have to start over!
The consistent practice and learning of these principles form a solid foundation for future success! You certainly can continue to refine your approach, you may even enjoy learning sophisticated methods that still fit within your trading style, however always try and keep it simple. Regardless of your approach always try and “find the simplicity on the other side of complexity”.
However one thing is almost certain, regardless of your style, that is that if you don’t practice the fundamentals with rigid consistency your chances of trading success greatly decrease.
So keep things simple and continue to learn. Learn to think like a successful trader, focus on capital preservation, trade with consistency, and keep a healthy long-run outlook.
Good luck.
