Hey traders, how is your trading going? How is life?
Let me ask you one question:
What do you think is the most important aspect of trading to get consistent results?
I guess your answers will vary, based on your experience, trading style, etc.
Is it the entry system?
Some of you will say that the entry system is the most important aspect of trading. At the end, you need to trade at the right levels right?
And that’s a good point, having a good system is important, but I really think that there are other aspects of trading that are far more important than this one.
And let me tell you why I think that… If you are trading the wrong currency pair (i.e. a currency pair with no clear direction) it doesn’t matter what entry system you use, you will get stopped out.
When you follow what I think is the most important aspect of trading, it doesn’t even matter what entry system you use, if you follow the rules, most of the time the market will move on your favor.
Bear with me…
Is it the psychological aspect of trading?
Some other traders will say that the psychological aspect is the holy grail of trading.
And again, its also a very important aspect of trading.
How traders need to deal with emotions is what makes trading different than other aspects of life.
And let me give you two examples: Lets say you want to run a marathon or play a very difficult piece of music in the guitar.
To play that song, you know that you need to practice, and if you do your homework, sooner or later you’ll be able to play it. To run a marathon you need to train, but again, if you train and do what you are supposed to do, you’ll be able to run it.
When it comes to trading though, even when you do everything right, and you follow all your rules, the market could still move against you and stop you out.
That is very difficult to deal with (internally)…
But no, it’s not the psychological factor, its something bigger.
Is it risk, trade or capital management?
This one is a difficult call, but no. I dont think any of these three aspects is the most important aspect of trading.
Risk management, how you manage your risk on each trade. This will certainly help you reduce your losses, but in no way will help you be more consistent.
Trade management, again, it helps you increase the profitability of your trade, but in no way helps you trade with consistent results.
And finally, capital management, which helps you increase your profitability (when things are going well) and limit your losses (when things dont go well).
But none of these techniques help you to be consistent.
Dont get me wrong here, risk, trade and capital management are important. You need all of them to increase your profitability, but most of the time these techniques help you get better results when you are already consistent.
Ok… now, this is what I think is the most important aspect:
This is it: Understand what the market is doing
That’s right… That’s what I think is the single most important aspect to get consistent results, and let me tell you why with an analogy…
What happens you get a brand new TV?
You are all excited, open up the box and the first thing that you do is try to figure out how the TV works… you have a bunch of questions, a few read the instruction manual and some others (like me) just push the buttons until they figure out how it works…
While trying to figure out how it works, you are stressed, because the thing is not doing what you are asking for, so its not a very pleasant experience.
And finally, you figure it out and now you understand how the TV works. Only then you feel relaxed now and there is where you start enjoying it.
Well… the same thing happens with the market.
If you dont know how it works, you are going to feel stressed, if you trade based on black boxes or magical formulas, you are going to feel stressed, you are not going to enjoy your trading, and believe me, that’s kind of a big deal.
And now, lets take a look at the other side of the coin.
When you understand what the market is doing, you dont need the perfect entry system, because you know what the market is likely to do. So even if you take your trades a little late, the market still has good possibilities to move in your favor.
Also, since you understand what the market is doing and what it is likely to do, your emotions will not kick in (at least, not in the way they do when you have no clue about what the market is likely to do), so there is no need to worry about psychological factors.
Do you see why it is very important?
And the 2nd most important: Understand risk
This one would be my second option…
I’ve wrote about Risk before and why it is important, so if you are interested you are going to have to review my previous articles :)
What are your thoughts about this?
I’d love to see what think, please share your views.