Essentials of Trading - January 23, 2012 newsletter
Sent Monday, January 23, 2012View as plaintext
The Essentials of Trading Newsletter
January 23, 2012
by John Forman
The Tripod of Your Trading Success
I was involved in a panel discussion the other day that I know some of you attended. The question was put to me to basically say that trader psychology is at least as important as the trading system/methodology in determining one’s success. While I agree that psychology is a big factor, I was not prepared to give it higher weighting. You shouldn’t either.
Brett Steenbarger (author of The Psychology of Trading) and I have talked about this subject and we both agree that trading success has essential three equal factors:
1) A positive expectancy system or methodology
2) An effective money/risk management strategy
3) The mental ability to always employ both of the above
Think about it this way. If your trading system has a negative expectancy – meaning the average trade is a loser – then nothing you do from a money management perspective will matter because you can’t turn a losing system into a winning one simply by adjusting how much risk you’re taking. Similarly, no amount of discipline will make up for the fact that your system is going to be a net loser in the long run, just as it won’t make up for poor risk management.
If, however, you have a winning system, you must have the other two elements in place to ensure its long-term success. A poor money management approach can sink even the best system. Likewise, if you don’t have your head sorted out and don’t properly follow the system and/or employ the risk scheme, you’re almost certainly going to at least cause reduced performance, if not outright failure.
So you need all three.
That said, it’s best when all three elements can be worked on in unison. This is really the essence of developing a trading approach that suits you individually.
Shifting to other business, the response to my inquiry the other day about doing an options webinar was quite positive, so we’re going to go ahead and set something up. It won’t be for a little while yet as I’ve got a trip coming up and the others have stuff on their plate as well. Look for more on the subject in mid-February, though.
Have a question about trading or the markets you would like me to answer or a subject you'd like me to address either in a future newsletter or on the blog?
Just send an email and if it's something I think has general interest, I'll definitely answer.
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