Most people’s idea of a trader is someone, who just sits on his desk, making tons of money, while drinking his coffee. In reality, things are far more complicated.
When the wanna-be trader makes his first steps, he usually reads about a forecasting method, which promises a great success rate. So, he decides that once he becomes a good analyst, there will be nothing to stop him on his way to trading success. Trouble is, a 100% accurate forecasting method simply does not exist. It might give you even 80% success rate at times, but if the other 20% cost you all that you have earned by then, you are not going anywhere.
Most inexperienced traders start searching for “the best” analytical method, the so-called “Holy Grail”, without realizing that the real problem is hiding somewhere else.
And that is where risk management and money management come to the stage. The ability to limit your losses and let the profits run. The will to ignore a good-looking trading setup, because of the greater risk that comes with it. Risk and money management is all about building your own set of rules, in order to take advantage of the successful trades and not allow the unsuccessful ones to ruin your account.
A couple of years later, our hero trader is a great analyst. He is also good at managing the risk and his balance. However, he still does not get the results he wants, because having a plan is one thing, but following the plan is a whole different story.
He is now able to recognize a good trading opportunity, which offers him a good risk/reward ratio. He is able to identify the stop-loss and target levels and know where to open the position. So far so good. But once in, he feels things are not going according to plan. His stop order is still far away, but the price is slowly moving towards it. Impatience and anxiety are taking over him. “It is going to hit the stop. I made a mistake, the forecast is wrong” is what he now thinks. So he exits the trade with a small loss, while his forecast is still valid. Soon after that, prices start moving away from where his stop-loss was and towards his target level. He is missing out on all the profits and anger grows inside of him. He correctly managed to predict what was going to happen and yet again, it all ended with another small loss. What went wrong?
Discipline, self-control, emotion control, patience. These are the things our trader still lacks. The psychological strength to stick to the plan, even when the situation is not going as good as he desires.
Controlling yourself is the final and most difficult part of the journey to trading success. So, even if you think you have found the “Holy Grail” of forecasting methods, chances are you have barely scratched the surface. You still have a lot of work to do…