- Well tested trading strategy
- Robust risk management plan
- Proper trading psychology
- Trade plan - The key to success
- Discipline - To keep you in the game
What is success in trading?
Success is not the same for everyone, it is one thing that is completely subjective and differs from person to person. But in a profession like trading, there is a clear definition of success.
Normally when individuals think about success in trading, they associate it with the profits they make and the money they earn from their trading activities. This is not entirely the case. No doubt over the fact that money does indicate progress but it should be looked at from a different point of view.
Let us consider two traders A and B. Both started with the same trading capital in their trading accounts and traded for one complete calendar year. At the end of the year, both traders ended up 50% profits on their capital. This sure is an amazing feat but how to determine who was the better trader?
Let’s look into more details. Trader A traded a particular well-backtested strategy that had a risk to reward ratio of 1:2 i.e. for every dollar risked he made 2 dollars of profits. And Trader A never risked more than 1% of his capital on any single trade.
Trader B did not have a well-backtested strategy and his risk to reward ratio was 1:1, which is not a bad risk to reward ratio to be fair. Trader B always traded on gut feeling and did not have a fixed risk capacity because of which he often faced big losses that ate up the profit he made on his winning trades.
If we judge the two traders based on their profits earned at the end of the year, there isn’t any difference but on learning about the details we find that trader A follows a proper plan, unlike trader B.
Life is not predictable and fair all the time, trader B who had no specific thought-out plan had the same returns as trader A. But it is quite possible that trader B did not sit peacefully during the times he traded as he most probably faced tough times because of no plan and no risk management.
On the other hand trader A who had a plan and managed risk well enough would have had a relatively peaceful trading journey. This is what success looks like when it comes to this profession of financial trading, be it stock trading, forex trading, options trading, etc.
Money is a byproduct of the process. Instead of focusing on the money traders must focus on the process. They must look to improve on their process of trading, try to fine-tune it, and make it as close to perfect. We say as close to perfect because nothing can be completely perfect.
What does it take to become successful in Trading?
We now know that traders should not be judged for success on the basis of the profits they earn, but rather are to be judged on the basis of the journey it took them to earn the profits at the end of the day.
There are several factors that play a role in the success of traders. Even though these factors could vary from one trader to another, we can still lay down a checklist about the same that represents the common most factors seen among the traders that have achieved success in their trading endeavors.
1. Well tested trading strategy
A trading strategy is a process of analysis that traders carry out and it gives them the signals for taking trades in the financial markets.
These strategies can be based on various types of analysis, technical analysis, fundamental analysis, quantitative analysis, etc.
It is one of the most essential components of profitable and successful trading as lots depend on this. The trades that you will take will depend it and the profits that you will make will also depend on it.
Now, there are hundreds of strategies out there that you can use to capitalize on the price swings, but it does not mean that you go on and choose any random strategy and start trading.
You need to choose a strategy that suits your personality, time schedule, and risk tolerance. By doing so you can gain additional confidence in your strategy and can increase probabilities of success.
Related blog post - How to choose a Forex Trading Strategy for Beginners & Pros
2. Robust risk management plan
No profits can be earned without taking a risk. It is often said that risk management is the only holy grail in this business of trading.
There are many ways by which traders can manage the risks that are associated with trading and those that they are exposed to while they get into a position in a financial asset.
The most common ways by which traders manage risk is by sizing the position of the trade well and having a stop loss in place. In order to do this, traders have to determine the risk they are comfortable with and then only take on positions that fit the parameters.
Some traders also go on and manage their risks by hedging their position i.e. if they have bought one particular financial asset then they would go short or sell another financial asset that is correlated with it.
Related blog post - Risk Management and Position Sizing
3. Proper trading psychology
Traders are humans after all with distinct characteristics and personalities. All humans have emotions that at times influence the decisions that they take.
Trading is a business where emotions cannot take control. Traders have to control their emotions when they are indulging in this activity and have to be practical and analytical in their approach.
There are many examples where traders have let their emotions take the best of them and the results were completely opposite of what they were hoping for. Traders that bring their emotions into the picture might win in the short term but in the long term, they will face difficulties.
Hence, psychology is immensely important. One way to manage this is to avoid having unrealistic expectations from trading. Get into trades according to the plan, manage risk, sit back and let the market do its thing.
Related blog post - Emotional Trading
4. Trade plan - The key to success
Through a trade plan, a trader gets his rationale for the trade. This allows him to capitalize on the price movements of financial assets. Having a trading plan laid out is an essential factor that dictates success in trading.
A trader that has a well-researched and backtested trading plan will have his entry, stop loss and take profit levels pre-decided. It keeps the process mechanical and systematic.
A trading plan allows traders to be practical in their approach to their trading activities and leave their emotions out of the game. This in turn increases the probabilities of them taking quality trades.
Hence, a robust trade plan comprises of a trading strategy, proper risk management, and proper trade psychology. If you have your trade plan in place, then you are on the right track in your trading journey.
Related blog post - 7 Factors to Consider while making Forex Trading Plan
5. Discipline - To keep you in the game
All that we have discussed will be of no use if the trader is unable to stay disciplined in their approach to trading. Discipline is the act of sticking to the plan throughout the journey and not deviating from the same.
If trading strategy, risk management, and psychology are three pillars of successful trading then discipline is the fourth pillar.
A trader that is disciplined in his approach to this business of trading will only take trades that his trading plan allows him to, will deploy a proper risk management plan, and will keep his psychology in check while he is taking the trade or is already in a trade.
Related blog post - 10 Trading Habits that will change the way you trade
How much time will it take?
There can never be a definite answer to this question, but if we did have to give an answer, we would say it entirely depends from person to person as no two people are the same and the learning curves can differ vastly.
We have discussed the factors that influence the success of traders in this profession. The checklist that we have laid out is not an exhaustive one but is certainly the most essential thing that every trader ought to check off while they indulge in trades.
These factors are not something that every trader is born with, but rather are something that traders pick up and learn as they go through their trading journey.
Having some skin in the game is very underrated. Some traders think that they can get the success that they are looking for by simply learning the theory and the basics and apply it practically and glide through with ease.
The reality is just the opposite. Just like any technical profession like law, medicine, engineering, etc where students have to have some practical experience and have to undergo formal training to actually become a professional in that particular field, traders too have to have some practical experience prior to actual trading.
There are two ways by which traders can get this prior experience, they could either join a trading firm by going through the hiring process and undergo the formal training that firms put their candidates through, or they can take matters into their own hands and practice by trading virtually or by paper trading.
Not everyone can get hired by trading firms, as they look for certain profiles only. Individuals can always get the education through the tons of information available out there and can test their skills in a simulation of the markets.
So in order to become successful in trading, individuals need to have a trading plan, risk management plan, proper trade psychology, discipline, and also spend time practicing all these before they formally begin their trading career. This is not a brief affair and will take quite some time to get through.
No two individuals are the same, hence the time taken by one person to learn the skill will differ from the time taken by another individual to learn the same skill.
All traders do not have the same learning curve, some traders learn and grasp quickly while some may take time. The key here is to not rush things and to learn at one’s pace.
After learning the basics and the theory part, individuals need to practice and this again will take time and will also differ from individual to individual.
Till this stage, individuals have already invested quite some time in getting acquainted with things and it does not end here. Even after spending time to learn and practice, traders will take time to attain success when they actually begin to trade.
Hence, as we already mentioned, lots of factors play a role in the success of traders, and the time that it takes to become successful in this business will surely differ from trader to trader. There cannot be a specific time span that will indicate success in this profession.
By this, we do not intend to discourage readers and potential traders. We simply intended to lay down the actual picture and the truth. We do not intend to paint a rosy picture and mislead readers into thinking that they can learn, practice, execute and become successful in no time.
All that we have discussed in this blog post is not to be applied to any specific domain of trading but rather is to apply to all kinds of traders i.e. those who trade forex, stocks, futures, options, etc.
How long did it take you to become successful?
If you are someone that has been trading for some time now, then do let us know about your journey to success. Do you consider yourself to be a successful trader?
How long have you been on this journey for and what all challenges have you faced during the time and how did you manage to overcome all of it to reach the level you are at?
Also, let us about your definition of success and how would you want your success to look like.
Through these blog posts, we intend to cover everything about forex trading and trading in general, hence we welcome every suggestion from our readers.
We would encourage readers to reach out to us with their questions or doubts through the comments section and we will make sure to revert to it at the earliest.