Something EVERY Trader Needs To Know

Estimated Reading Time: 5 minutes

Originally I am from Germany, but for the past 9 years I have been living in Austin, TX. One of the many things I really enjoy about living in Texas is the excellent BBQ. And, of course, I love to BBQ in my own backyard.

Make no mistake, there's a HUGE difference between "grilling" and "barbequing". And I learned quickly that you can't call yourself a true "Pitmaster", unless you have mastered the Holy Trinity of BBQ: Brisket, Pulled Pork and Ribs. I can nail the brisket every single time, and my Pulled Pork is outstanding, but my ribs still have some room for improvement.

So what does THIS have to do with trading?

Let me explain.

In order to make the perfect brisket, you have to master three areas:

  1. Mindset:
    You can't rush a brisket. It takes at least 12 hours to cook, and there are no shortcuts. If you are impatient, or look for a quick fix, you will fail.
  2. Method:
    Obviously, you need a great method to prepare the perfect brisket. It all starts with the right meat, a great spice rub, a professional BBQ pit, an awesome BBQ sauce, the perfect temperature, ... and much more. If you mess up just one of these things, you can ruin your brisket.
  3. Management:
    I know it might sound a little bit weird, but when you cook for 12 hours, you need to manage your pit. You need to fire it up at the right time and regularly feed more firewood so that the fire doesn't die. And lastly, you need to constantly monitor the temperature, and check the meat to make sure that it is not cooking too fast.

Back to trading ... if you want to make it as a trader, you have to master the same three areas:

Mindset, Method, Management

If you fail in any one of these areas, you will fail as a trader.

In the following section, I will give you a quick overview of what I am talking about, and in upcoming posts, I will cover these aspects of trading in more detail.

Trading Mindset

Trading is a business, and you need to treat it as such. It is not a game! It is not a "get-rich-quick" scheme! If you need money right now to pay your bills, then day trading is not for you!

As a day trader, you need to be disciplined, focused, confident and organized.

You must be able to create a trading plan and then execute the plan.

And you must also be able to control your emotions. As a trader, you will experience emotions like greed, fear, anger, frustration, stress, anxiety, just to name a few. As you can see, most of these emotions are negative emotions, and if you can't control them, they will take over and sabotage your trading.

So here is the trading mindset you must have. You need to realize that trading is a marathon and not a sprint. It doesn't matter whether you made or lost some money today, because you have to keep the big picture in mind. Even the best traders have losing days and losing weeks. Keep your eye on your objectives, and make sure that in the long run, you have more winning days than losing days, and more winning weeks than losing weeks.

Trading Method

You must have a method to reliably determine which way the market is moving: up, down or sideways?

Because knowing the direction the market is moving in, will help you apply the right trading strategy. Use a trend-following strategy in a trending market, and a trend-fading strategy in a sideways market. If you use a trend-following trading strategy in a sideways market, you will get whipsawed and frequently stopped out.

A doctor first diagnoses a patient before prescribing a treatment. As a trader, you first have to diagnose the market and identify the market condition before applying a trading strategy (treatment).

You also need to make sure you also understand the characteristics of your trading strategy. Is it a trend-following strategy, a trend-fading strategy or a scalping strategy? Knowing which market conditions your trading strategies are best suited to, and then patiently wait for these conditions, will greatly improve your trading performance.

Management

There are several areas of "management" that you need to master:

  1. Trade Management
    Limit your risk by using a stop loss. And take profits while they are there by using a profit target. Don't let a winning trade turn into a loser.
  2. Money Management
    It is proven that improper money management can wipe out your trading account despite having a profitable trading strategy. Make sure you understand money management and use it appropriately to grow your trade equity.
  3. Business Management
    Trading is a business, and you need to manage your trading as such. You must set goals and have a plan on how you will achieve these goals. And of course, you need to keep records, not only for tax purposes, but for your own business analysis. It is critical to know what time of the day you experience winning trades and when have losing trades? Are there particular days of the week where you are more or less successful? Are your long trades outperforming your short trades? Do you experience more losses in one market over another? When you KNOW your strengths and weaknesses, you can adjust your plan accordingly and increase your overall trading performance.

In this post I have just scratched the surface. In upcoming posts, I will explain these areas of trading in more detail.

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