We all know that the statistics in trading are stacked against us. Each quarter US FX brokers are required to report their client’s profitability on their trading accounts. Each quarter, year after year the statistics show more or less the same figures – around 70% of all traders will consistently lose money. This is a particularly scary statistic, yet it is one we must embrace and understand rather than shy away from, pretending it doesn’t exist.
Despite the fact that 7 out of 10 traders will be run losing accounts, there is hope. There are plenty of stories of success to encourage traders to enter the market or start trading. Those that run a profitable account manage to do so because they have found an “edge”. This is an “edge” which they can apply consistently to their trades, which results in a profitable account.
So where is this edge?
There are three pillars that make up the basis of successful trading. These three pillars are:
- Risk Management
- Trading psychology
In order to be a successful trader and run a profitable account, it is essential that you have these three pillars in your trading. That is where the edge exists, it is the sweet spot where risk management, strategy and trading psychology are all present. Let’s look at each in little more details.
Strategy is needed in order for you to know what you will trade, which way you will trade, how you will trade. This basically covers the investigation, analysis, research and techniques that you use to get in and out of trades.
Trading psychology is needed to keep a balanced mind whilst trading, this stops your emotions leading the trade.
Risk Management is essential in order to keep control of losses and the account as a whole. Whilst this is often considered the boring or dull part, it is also the part that will stop you from blowing your account. It is therefore well worth your while starting your trading journey from here.
If one on these pillars is missing, then trading will not come together in the profitable way that you envisage.
Imagine you had a balanced mind, so trading psychology plus strategy, but you had no risk management, this would make you on par with a gambler.
Imagine you had a strategy and risk management but no trading psychology, no balanced mindset. This would make you an insecure trader. Finally, if you had a balanced mindset and risk management but no strategy, your trading wouldn’t be going anywhere. You would essentially be stuck with no direction.
These points illustrate just how important all three pillars are when you trade. Each time you trade it is essential that you have given sufficient consideration to each of the pillars. Whilst there is a common misconception that with the right strategy you can win in trading every time, this is quite simply not true. A good strategy is just a part of what is needed to run a profitable account. This must be joined with strong risk management and a balanced mindset.