What are the Pillars of Successful Trading?

Trading financial markets can be extremely rewarding, but it’s not as easy as many people would have you believe. It’s not just a matter of getting started and then smoothly building your profits until you’re sipping champagne on your private jet; becoming a successful trader takes time, effort, skill and discipline. In fact, there are four areas that need to be understood before committing money to the markets:

• Fundamental analysis
• Technical analysis
• Trading psychology
• Risk management

Traders may choose to focus on fundamental news, or may prefer to place more emphasis on charts and technical analysis, but in our experience, a combination of both is the best approach for making shrewd trading decisions.

Whatever type of analysis you’re using, two factors remain consistent for any successful trader – the ability to control your emotions in any situation, and to manage your risk consistently at all times.

Fundamental analysis

Fundamental analysis can take many forms, from headline news and macroeconomic data, to company balance sheets and price/earnings ratios, etc. However, for most traders, it’s macroeconomic data that’s most important. Interest rates, GDP, inflation and employment data are some of the Tier 1 macro data announcements released regularly by government agencies around the world. Not only can this data cause fast, short-term fluctuations, but if you combine a series of monthly figures together, this can paint a longer-term picture of the economy in a particular country.

This in turn will provide the potential direction of its stock market, bond market and currency. For short-term traders, who could be holding positions from a few minutes to a few days, it’s essential to know in advance what macro data is being released on a particular day, and which markets may be affected. There are many free economic calendars available online, but be aware that data updates can take a couple of minutes to appear, by which time it may too late.

Technical analysis

Charts are the most honest reflection of market sentiment; they plot prices as they are traded, with price movements incorporating fundamental news, as well as the hopes and fears of traders and investors. Anybody can look at charts, but it takes skill and discipline to analyse charts correctly and accurately. Most traders focus on primary indicators, on the chart itself, such as support, resistance, trends and price patterns, while others take a more advanced approach, adding technical indicators such as oscillators, moving averages or other studies derived from formulae. However you choose to analyse the charts, you should build a structured and robust trading strategy, and ensure you follow a fixed set of rules at all times – especially when your heart is telling you to ‘go for the big one’.

Trading psychology

This is the single most important aspect of trading, and the number one reason why many traders fail. It’s essential to maintain a calm head when trading, through good times and bad. In fact, staying in control while holding a winning position is often the hardest thing to do. We learn our behaviour by living in society, but often we need to behave differently when trading. To borrow an excellent quote from Warren Buffett: “We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful.”

The best way to maintain psychological control is to avoid subjective decisions wherever possible. Instead of thinking “The price will definitely go up, so I’ll buy it now,” you should try to focus on objective decisions, such as “If the price breaks 5 pips above 1.0945, I’ll buy at 1.0950 with a stop loss at 1.0910 and target 1.1040.” Try to keep things boring; trading is never boring, but if you can stick to a structured trade plan, your stress level will be reduced, and your performance level will be enhanced.

Risk management

Capital preservation is another essential ingredient for successful traders. If you run out of money, you must stop trading, so you need to fix your risk limits – on a per-trade basis as well as for your overall portfolio – and stick to them. For example, risking 1% of your equity per trade, 2% per day and 4% per week will keep any losses within manageable levels. If your losses hit any of these limits, then you should stop trading for the day, or week, as appropriate.  These are rules, not guidelines, and should never be broken. If you allow losses to grow beyond predefined limits, then the percentage returns required to recover your losses will increase exponentially; this will add psychological pressure, which in turn may lead to further breaches of your risk management rules. Prevention is better than cure, so fix your risk limits and stick to them… always!