TRADETHINK ARTICLES : Three Keys to Successful Trading

FutureSource.com: Fast Break for Traders

August 24, 2007

Education Edition

Today's Featured Article

Three Keys to Successful Trading

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.


Disclosure: Commodity trading has large potential rewards, but also large potential risks. You must be aware of the risks and be willing to accept them in order to invest in the futures markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to buy/sell commodity interests. Users of the software are solely responsible for the operation of the software and trade postings to this website are either only as examples of how the software works or the results of operation of the software after the market closes provided to licensees of the software only to help validate their operation of the software. Trade Think does not manage any money or provide trade or investment recommendations.

Notice: Returns are hypothetical. Hypothetical or simulated performance returns have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since trades have not actually been executed, the results may have under or over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight, no representation is being made that any account will or is likely to achieve profits or losses similar to those shown.

TRADETHINK SHOWS YOU AUTOMATICALLY:

• when to enter the trade ... • where to enter the trade... • trend direction ... • when to exit the trade ... • where to exit the trade ...

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. INVESTMENTS IN FUTURES INVOLVES HIGH RISKS AND YOU CAN LOSE A LOT OF MONEY.

FUTURES TRADING HAS LARGE RISKS. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN ORDER TO INVEST IN THE FUTURES MARKETS. DON'T TRADE WITH MONEY YOU CAN'T AFFORD TO LOSE. YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN THE FUTURES INDUSTRY. IN SO DOING, YOU SHOULD BE AWARE THAT TRADING FUTURES AND OPTIONS ON FUTURES CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE VALUE OF YOUR ACCOUNT. THIS IS NEITHER A SOLICITATION NOR AN OFFER TO BUY OR SELL FUTURES INTERESTS.

USERS OF THE SOFTWARE ARE SOLELY RESPONSIBLE FOR THE OPERATION OF THE SOFTWARE. TRADE POSTINGS TO THIS WEBSITE ARE EITHER ONLY EXAMPLES OF HOW THE SOFTWARE WORKS OR THE RESULTS OF OPERATION OF THE SOFTWARE AFTER THE MARKET CLOSES. THIS IS PROVIDED TO LICENSEES OF THE SOFTWARE ONLY TO HELP VALIDATE THEIR OPERATION OF THE SOFTWARE. TRADE THINK DOES NOT MANAGE ANY MONEY OR PROVIDE TRADE OR INVESTMENT RECOMMENDATIONS. PROSPECTIVE TRADE THINK CUSTOMERS ARE ADVISED TO MAKE DECISIONS BASED UPON THEIR SPECIFIC CIRCUMSTANCES AND NOT MERELY ON THE INFORMATION CONTAINED ON THIS WEBSITE. THIS BRIEF RISK DISCLOSURE STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THE FUTURES INDUSTRY, WHICH SHOULD BE CONDUCTED INDEPENDENTLY BY YOU WITH THE EXPERTS OF YOUR CHOICE.

ALL TRADING INVOLVES HIGH RISK. THERE HAVE BEEN NO PROMISES, GUARANTEES OR WARRANTIES SUGGESTING THAT ANY TRADING BY TRADE THINK USERS WILL RESULT IN A PROFIT OR WILL NOT RESULT IN A LOSS.

ALL RETURNS PRESENTED ON THIS SITE ARE HYPOTHETICAL. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

TRADE THINK AND ITS CURRENT EMPLOYEES HAVE HAD LITTLE OR NO RECENT EXPERIENCE IN TRADING ACTUAL ACCOUNTS FOR ITSELF OR FOR CUSTOMERS. BECAUSE THERE ARE NO ACTUAL TRADING RESULTS TO COMPARE TO THE HYPOTHETICAL PERFORMANCE RESULTS, CUSTOMERS SHOULD BE PARTICULARLY WARY OF PLACING UNDUE RELIANCE ON THESE HYPOTHETICAL PERFORMANCE RESULTS.