Imagine an equilateral triangle. Three equal sides, existing as a whole together. Occasionally, one might pull at the other two. One side might grow while the other two shrink. The triangle might morph in to an acute or an obtuse triangle before settling back in as an equilateral. If you can picture this, you’ve essentially just visualized what it entails to be a constantly evolving and adapting, total trader.
Each side of triangle compose one third of the elements required to be a holistic trader. One side is the technical know-how, the other is risk or money management, and the third side is the mental or psychological aspect to trading.
To fully perform as a trader, you will need to be good at all three of these elements and have them all fine tuned to fit your trading personality. The three work off of each other and give you a full, total, healthy environment to trade in. One cannot move without affecting the other two. They are separate yet always connected.
The Technical Edge
The first part of the triangle is your ability to view, read, and interpret the market. For maximum success, this needs to be a fool proof methodology that is clear and coherent to you. It includes your trading analysis, market analysis, and how you see and break down market events. This can be done in the form of charting or any other way you prefer gathering information towards your analysis. This edge lets you plot the prices and events you want to make your trades based on.
Also included in this technical savvy, is your trading strategy. A suitable trading plan will allow you to have a profitable edge and will enable you to apply all of your knowledge gained from analysis in order to successfully trade.
The last part of the technical angle is to be open and to allow never ending learning of the market. You need to be open to continuous research based on new events that will arise from time to time. The market is always changing, so you need to be ready to continually adapt.
Money Management Edge
The second key to fulfilling your goal of becoming a complete trader is risk management. The trick here is to remember that whatever you do, you should always plan your action according to the worst case scenario. In order to inoculate yourself from risk, you need to have as many protections set up around your trading habits. The market is well known to throw surprises and spoilers at us at any minute. Implement your defenses early on in your trading plan.
It’s also important to always mind a preferred RRR – risk reward ratio. Always enter at the very lowest and tightest risk weight until you get a fine edge in your everyday trading routine. Take very small risks. Sure, you’ll miss some opportunities but when you do hit, your reward will be so much more impactful. This will compensate for all the trades you might have missed.
If you take more risk per trade and you enter the market prematurely, you will take more trades but you’ll also likely be taking more losses. The multiple reward ratio on wider risk is less rewarding. Any way that you look at it, patience pays.
For example, let’s say you have a range of 100 points in the market. You could risk on that trade 5 points in order to make 95 points. Your risk reward ratio here is 95 divided by 5 which is 1 to 19. If you take the same range and let’s say you risk 10 points for this 100, it’s 90 divided by 10, which cuts it down to just 9. By only shifting 5 points in your risk, your risk ratio dropped almost 2x. If you use this type of risk management in a systematic way, your reward will be significantly better than if you recklessly trade without patience.
Lastly, learn where the odds are best for you. Where are the entries with the lowest risk probability? This will give you huge edge in the way you manage your risk. It’s not only about when, it’s also about where. This is where your analysis comes in to play big time.
Trading Psychology Edge
This is incredibly important, mainly because it’s intangibly unique to each trader. There is no blanket rule here, rather it’s dependent on each trader’s mind. It takes a lot of time to learn to control your intangible emotional elements. Knowing your strengths and weaknesses and learning how to embrace them is what will give you the power and control to use them in a manner in which they won’t negatively interfere with your trading.
An action plan will be extremely useful here as well because it will hopefully be based on a personality map of your unique mental characteristics. You need to know how you’ll react to all the events you’ll potentially face while trading. From there you can form ways to how you’ll react to all of these situations. A well thought out action plan based on your unique psychological state gives you a huge leg up when trading. Without it, you could quickly find yourself lost.
Another important aspect to the mental side of trading is to be self aware and approach trading ego free. There is no need to impress anyone, only to keep your bank account in the positive. Cut out your ego and look inside yourself, be honest with yourself and truthful, and the market and your actions in it will become clearer.
Putting the Trio Together
Once all the elements are put together, the work still doesn’t stop. To stay effective, you’ll have to modify certain pieces over time, all of the time. Go deeper, do more research, engage in more experiments, and cultivate more awareness. Keep adding everything you learn minute by minute to your plan. The best trading plans are never finished. They need to constantly evolve in order for you to survive in the market.