Trading the markets successfully is EASY once you understand the process of successful trading.
There are PRINCIPLES of trading that you must understand and master before you will ever become consistently successful. I know because I have been on the trading journey for over thirty years.
A trader can make some money short term – simply by chance – and start to think he is a successful trader. Just as you can drive a car 100 metres and think you are a driver. You might know the controls and understand how to drive a car. However becoming a competent driver is another matter.
It is the same in trading. A trader can think he is a trader because he knows a lot about the market and understands (or thinks he understands) the process of trading.
The first point to understand about trading is that it is not about acquiring information or knowledge. There are exact and specific steps that you must master before you will become successful. Most traders are not even aware that these steps exist.
The majority of traders are simply gamblers and will never succeed because they will not invest the time and effort necessary to master the process. They think it is just a matter of opening a demo account and practising until they succeed. The truth is they will never succeed because the process of success in trading involves steps they will never take.
I have created a formula known as the SECRET formula. This formula explains how and why successful traders make money. I will now give you an outline of the formula:
S – Small losses (you must strictly control losses)
E – Extended Profits (you must let your profits run in order to give you big profits)
C – Consistency (you must have a method that you apply consistently)
R – Risk/Reward (This is VERY important: I go into this in detail below)
E – Edge (You must have an edge and understand it clearly)
T – Trade Plan (You must have a trade plan which translates your edge into a plan)
If you master the SECRET formula – you will become successful. If you don’t then you are gambling, not trading.
In the rest of this article I will go into detail regarding the Risk:Reward ratio.
What is it?
How much you risk on a trade compared to how much you stand to gain.
Why is it important?
You really need to understand it in order to be successful. Many traders trade a 1:1 or a 1:2 or perhaps they might extend to a 1:3
I trade a minimum of a 1:10 because that gives me a huge edge. I only need to be right on 1 out of every 10 trades I place. Some trades I place give me far more than 1:10
If you have a 50% success rate and you trade 1:2 – you will make money. The success rate can be a lot lower when you increase the risk:reward ratio.
The next important point is how big your stops are. Many traders set their stop loss at 50 or 100 pips or even more. My stops are typically 10 pips or even less for day-trading.
One of the keys to successful trading is to stay with a winning trade when you are in it. This is the hardest thing for the rookie trader to do because he does not want to give much money back to the market.
However, it is usually necessary to give some profits back in order to make the big profits because markets do not move in a straight line.
This requires you to develop psychological mastery. You must master the ability to stay with a winner – while cutting losses short. This means you will necessarily be ‘wrong’ on a trade a lot more often than you are ‘right.’
This is because your losses will be small while your few profitable trades will be at least ten times the size of your losses.
I have worked with many traders who are struggling and as soon as they ‘get it’ about letting winners run – their trading turns around.
In summary, in order to be a successful trader, you need to master all the steps. The chances of doing this alone without any coaching or training by someone who really understands the process, is practically zero.