Most of us feel that trading is all about identifying a profitable strategy and then use it to make money from it. Sounds simple, but the question is, if it was that simple, then how only less than 10% traders make money and more than 90% of traders lose in the same markets. Do you have any ideas?
As I perceive, Trading is not just about finding a profitable strategy. Trading has a lot to do with ONE’S personality, meaning thereby it is completely on us how we consider Trading. Some of us think that through Trading, we can make huge amount of money in a very short period and so we subconsciously consider Trading as Gambling. Some of us think that Trading is all about manipulations and ultimately it is designed in such a way that we end up losing our hard-earned money and so we consider Trading as a huge Risk.
This entire thing can be summarised through a very famous quote by a legendary trader Ed Seykota;
“Everybody gets what they want out of the Market”
TRADING, as I experienced is a combination of the three most important aspects, also defined as Three Strong pillars of Trading, which are as follows:
- Strategy: Strategy basically means a system or a framework which has defined rules regarding Trading. A strategy should tell us the entry as well as exit from the market. Also, it should have specific rules to define a setup. A strategy can be easily created through the study of Technical Analysis concepts.
- Risk Management: Risk Management is something where the numbers come into the picture. Traders must know how much they are risking in order to earn returns. Risk Management includes right volume, accuracy, risk to reward, etc. Risk Management is one of the most important aspects of Trading, and if ignored will lead to disastrous consequences. Stoploss is the most important player in Risk Management.
- Psychology: As humans, we are highly emotional beings and thus Psychology plays a major role for a trader to make consistent money in the markets. Psychology can only be understood when it is experienced with live markets, investing your hard-earned money. How you react to a situation when you are losing money or making money, defines your psychology
All the above aspects of trading have been explained very briefly but they are very big topics. Each of these topics will be covered individually in my upcoming blogs one by one.
For now, I wish to explain the weight of each aspect of Trading because there is a huge misconception regarding the same.
This takes me back to the beginning of this blog, most of us feel that Trading is all about having a strategy that is profitable but honestly, that has the least weight, out of all the three aspects regarding Trading. The weightage I assign per my experience of Trading to these three aspects is as follows:
RISK MANAGEMENT 35%
Strategy (20%) is one aspect that everyone runs behind, having a misconception that if we have a perfect strategy, we will make money. But honestly, any simple strategy which has specific rules and follows proper technical analysis can help you make money; provided we follow it completely. Where we fail in this aspect is when we involve our Emotions into it, and we ignore the rules of the strategy. Honestly, it’s not the strategy as such, but how the trader trades that strategy with proper discipline that gives results.
Risk Management (35%) is something which most of the traders ignore. We should always know how much one can lose or make before entering the Trade. But most of us, think about all this after taking the trade or when the damage is already done which means when the trade is running in losses. Volume and stop-loss plays a major role in curbing risk. Without Risk management, it is impossible to make money consistently over the long run and hence so much weightage .
Psychology (45%) of a trader plays the maximum role in deciding whether we can be a consistent profitable trader or not. Though it’s a very detailed topic to talk about but it all boils down to one thing which is controlling your EMOTIONS. Emotions include controlling Greed and avoiding Fear. This statement is very small but it’s very powerful, we will be discussing just this statement in my upcoming blogs.
There are many amateur traders who make money in demo account but when they trade in Live, exactly the opposite happens. Why do you think so? The only difference is that in Live Accounts, real hard-earned money is involved and in demo account money is virtual. And whenever MONEY is involved, our psychology tends to get affected a lot and this is where the main GAME OF TRADING begins.
Overall, all three pillars of Trading are very important, it is not possible to Trade gainfully and make money if any one of the three is missing. We also need to understand our priorities.