The 5 aspects of trading that you need to master to become a successful trader

Five Aspects of Trading

We all have different ideas about what is needed to become a successful trader, but I guess it all comes to this:

Knowing about what gives you a better chance to win a trade and using that information to put the probabilities on your favor.

Notice I used the word: probabilities. Because in trading is all about it, you will never be certain about anything in the forex or futures or stock or any other market.

So you need to learn to live with it, and start thinking in probabilities terms.

Once you begin to think in probabilities terms, everything becomes easier, a lot easier. Because now you don’t need to be right every single time.

You know that sometimes the market moves against you, and some others on your favor, so at the end, our job is to make sure we make more money when the marker moves on our favor, than when it moves agains us.

Do you agree with me?

I’d like to know what you think about this… let me know in the comment section.

Anyway, to make sure you make the most out of your trades (when the market moves on your favor) you need to focus on these 5 areas:

#1 Before your trading takes place (analysis)

I think this one is the most important of them all.

Your job is to make sure you trade the right currency pairs, the ones what have the clearest market condition and the most profit potential.

If you do your analysis right, you will increase both: the accuracy of the system and the risk reward ratio of each trade.

So if there is a holy grail of trading, this is it.

Common mistakes of this area to avoid:

  • Trade only one currency pair everyday (you’ll force yourself to take trades when the market is difficult to trade)
  • Use subjective tools and indicators to analyze the market
  • Get biased because of what other traders/analysts think about the market

#2 Trade entry

Trade Entry

Well… what can I say about the market entry, most traders think this one is the most important aspect of trading…

Guess what? It isnt…

Not even close (the most important is the analysis you do before your trade takes place).

Look, if you trade the right currency pairs and in the right direction, it doesnt really matter what system you use to trade the market, most of the time the market will move on your favor and you will make money.

You need to worry when you dont do any type of analysis or worse yet, do the wrong type of analysis (going short when you are supposed to go long, etc)

So please, quit looking for the perfect system…

A simple MA crossover could be good enough, if you do the right analysis.

Common mistakes of this area to avoid:

  • Get caught in the eternal search for the perfect system
  • Use hundreds of indicators to confirm your trade (simple is better)
  • Using subjective tools to trade the market
  • Not having a systematic approach to enter your trades

#3 Money Management

Most of you already know what money management is, but still very few take advantage of it.

Money management answers one simple question:

How large should my next trade be.

This helps you:

From the winning side – to geometrically increase the size of your trading account when things go well…

From the losing side – to avoid the risk of ruin, you’ll trade smaller when things don’t go well…

Common mistakes of this area to avoid:

  • To think that since your account is so small you dont have to use any MM technique
  • Coming up with your own methodology (subjective) and not following any of the sound methodology techniques

#4 Trade & Risk Management

As I said, traders tend to focus in the “entry”, but the reality is that the “exit” is what determines how well (or bad) you did with your trade.

Risk management refers to where you are going to place your SL levels, while trade management helps determine how you are going to manage your trade.

Both of these techniques help you increase the profitability of your trades or decrease the average losing trade.

Some of these techniques are: trailing stop, scale in your trades, partial profits, pyramid in, partial losses, and other.

Common mistakes of this area to avoid

  • Dont use a systematic approach to apply them, some days use one, the next day other, etc.
  • Not use any technique at all
  • Taking partial profits could decrease the risk reward ratio, so please pay attention and use it wisely

#5 Trading Psychology

trading psychology

Wow… trading psychology is probably the most difficult to master…

You get there with experience, being disciplined and patient.

To be in the right state of mind means that you have understood one simple word: RISK

Once you understand that every trade has the possibility to move against you, you will stop blocking important information, that always has been there, but it was invisible to you because of your “fear of losing”.

Once you understand risk, you fear will go away (or most of it), you will cease to see the market as an adversary, you will just trade, objectively based on what you see, not on what you think…

Sometimes there is a very thin line between a successful trader and a trader still struggling with the market… sometimes this thin lines is called: state of mind.

Common mistakes of this area to avoid:

  • Think that you need to win 100% of the time

My Rating

Which one of these five would be the most important?

I guess it varies from trader to trader… but this would be my rating:

(From most important to less important)

  1. Analysis
  2. Trading Psychology
  3. Risk & Trade Management
  4. Money Management
  5. Entry system

Your turn

What do you think of my list? Do you have any other aspect of trading that you consider more important than these 5?

Which one do you think is more important?

Please share your view in the comment section.

Tags:


Raul Lopez

I've been trading the markets for more than 15 years. I believe the best way to trade is by adapting to the market conditions. You can learn it too, join our community .

  • pduarte

    As you know, I have other business to run, so I don’t have all the time to trade, but I can have enough time to make some trades and I am having pretty good results (You taught me very well ), I can say that I am doing between 10% to 20%, each month (easy), and I don’t trade every days. So I think it’s good results.

    Cheers,

    Paulo

    • Raul Lopez

      Wow Paulo!!! Cheers for that! (sorry for the late response)

      Just good results? Those are wonderful results… specially because of the way the market has been trading lately!

      Cheers Paulo!

  • pduarte

    Hello Raul,

    I agree with you, about these 5 rules, and I have two more that are in the context of these five, which are:
    1- Trading Plan.
    2- Discipline.

    What do you think?

    Cheer’s,

    Paulo

    • Raul Lopez

      Hey Paulo,

      You are right… Having a trading plan and the discipline to follow it are also important aspects of trading that every trader required to achieve consistent results…

      How is your trading going?

      Cheers,

  • Himanshu Dutta

    Good insights for novice traders ! I just got them revised and checked myself !

    • Raul Lopez

      Cheers Himanshu!

      • Himanshu Dutta

        Cheers Mr. Lopez !

  • Chandana

    Thanks for the post Raul. To me, it is valuable like a short note of a two day seminar!. Short and simple and very handy to keep by the side and read before starting treading every day.

    Like to ask one question,
    How many currency pairs, do you think, we should trade at any given time? I mean maximum, how many pairs should have open positions (considering day trading/swing trading).

    • Raul Lopez

      Hey Chandana, very good questions…

      There is no one right answer… It all depends on your risk appetite and how comfortable you feel about the % of risk on your account.

      But let me give you an example… I consider myself as a conservative trader. I only risk 1% of my account per trade. And I have a rule that at any given time I must not have more than 3% of my account per trade. This means that I can only have open 3 trades at a time (when risking 1% on each one of them)…

      But there are times when I have nothing at risk (p.e. I have moved my SL to the break even level or to lock in some profits), in this case I can have more than 3 opened trades at a time…

      Now, this is me, but there are other traders that feel more comfortable traders using 2% per trade, therefore 6% at any given time…

      Hope this makes sense… If it doesnt, please let me know.

      Cheers,

      • Himanshu Dutta

        It made a complete sense Mr. Lopez !

      • Chandana

        Excellent!

        Your answer will have a direct impact on my trading habits as I see a big value in it.

        I have noticed, specially during news release times, most of the pair movements are correlated; i.e. all of them move at the same time. So there is a possibility all positions hit the Stop-Loss regardless of we having different pairs.

        Covering up my existing ‘probable’ losses before going in to a new trade was one of my weaknesses. Now you have given me an insight to work on it.

        Thanks a lot again Raul.

        • Raul Lopez

          I’m glad it was helpful! thanks for your comments!