TRADETHINK ARTICLES

Three Keys to Successful Trading

August 24, 2007

By Chris Morse

A Good Trading Approach/System

A good trading system is a paramount prerequisite to having a successful trading outcome. There are several components to a quality trading system. First one must find a robust trading strategy. A robust strategy is a system that can follow multiple markets and market sectors such as (fuels, currencies, grains, bonds, meats and metals) with the exact same inputs. In other words the strategy that would trade gold is exactly the same as the strategy for trading crude oil, Euro currency and all other markets.

To trade a system with different inputs or strategies per market would be curve-fitting. A good strategy should not need to be tweaked or adjusted. If a strategy requires change, then it is obviously not a very successful trading strategy. Be leery of any system that needs to be changed on a constant basis.

Next a good system/strategy needs to have a way to measure its performance. In order to measure performance of a system a sample of data needs to be quite large. A system that can be tested ten or twenty years back with consistency is going to have a much better chance for success. Whereas, a system that can only be tested on just one or five years of data will have a much lower probability for success.

Finally clear and concise entry and exit points need to be shown for each trade. Successful systems should show you the exact price and time to enter and exit a market. A system that requires discretion from an inexperienced or novice trader is very unlikely to perform as well as a system the shows precise trading signals.

Sufficient Trading Capital

Rule #1 - Don't run out of money.
Rule #2 - See Rule #1.

It is of the utmost importance to be properly capitalized. To attempt to trade with insufficient capital can be a direct path to trading destruction. If you do not have the money to weather the ups and downs in the market you will probably lose.

It is important to understand what type of run up and draw down to expect in order to know how much money you need to trade. If you have realistic expectations and understanding of a trading system you will have an idea of the monies required.

Good trading systems will follow many markets simultaneously and can require $25,000 to $100,000 or more to trade successfully. Beware of a system that claims you can trade but a few markets and be successful. Do not trade unless you have sufficient risk capital. Keep your money until you possess the required account size.

Discipline

In addition to having both a good trading strategy and being adequately capitalized to trade you must have the discipline to follow your system in good times and bad. A lot of new or inexperienced traders will cherry pick trades. They watch a variety of markets and pick and choose what may or may not be a good trade. Even worse a trader will see a winning trade and want to take those profits off the table too soon or even worse take a losing trade and let it go only hoping it will come back to break even. Let your winners run and cut your losses. This is where an automated trading system such as Trend Simplicity can be of great help in assisting you to set an exact entry and exit point.

It is of great importance to not get shaken out of a market when you are in a draw down. I have seen many traders that have had a good trading system and were well funded still loss due to lack of trading discipline. You have to have the discipline and staying power when in a draw down. What happens is a trader will start trading a system after they watch it go up and make a lot of money. The problem is that all modes of trading will pull back after going up. Many will second guess their trading and pull out of the markets after seeing draw down. Even worse they will continue to watch the trading system only to see it recover and profit what could have been theirs. Next the trader will reenter the market after watching the system recover. Guess what happens next? The system goes though another draw down and the trader is either too financially or emotionally shaken up to trade again.

At Trade Think we do our best to explain the importance of trade discipline. We even have brokers that can auto-trade our systems for our clients and hopefully take some of the emotion out of their trading.

Summation

As you can read from above there are three keys to successful trading. You need a robust system, enough money to trade with and discipline. If any of the three keys are missing you can see how it will be a challenge to trade successfully.

About the Author

Chris Morse is the Developer of the TradeThink trading system. He has been involved in the development of trading strategies for nearly ten years. Mr. Morse developed a very robust system which is now in private use at one of the largest FCM's and has earned sizable returns for the last 3 years. Mr. Morse now focuses his time exclusively on developing and managing his systems.