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I was recently at a family get together.  We were celebrating one of our newest family member’s first birthday.  I love these events because it’s a great opportunity for all of us; parents, grandparents, aunts, uncles, nieces, nephews, cousins and our closest family friends to be together in one place.  I’m fortunate enough to have a big family that all lives within the same general area so these gatherings happen several times a year.

Recently, some of my uncles have taken a great interest in trying to figure out what to invest in.  There are not a lot of good options these days and as we all get older (and hopefully a bit wiser) most are not interested in some of the better obvious choices like real estate or new businesses.  Been there, done that!  Something more passive and less time intensive is what tends to be the most attractive option.  Inevitably, the idea of investing, and more specifically, TRADING is where this conversation usually leads.  Mainly, because I have vast experience (go here to check out my experience) in this area and they want to pick my brain to see what might be the best choices for them.

These conversations are pretty predictable as far as how they are going to turn out.  Forex!  Sure I could lead them into futures or Stocks and options.  But forex is where I would like to see them begin, mainly because of the excellent levels of diversification that is available, the ability to trade it on different timeframes (like daytrading or swingtrading), and MOST importantly, the great flexibility in position sizing that forex trading provides.  While this might not be what inexperienced traders typically think about, position size is in my view, one of the top three elements to successful trading and IS a ‘make or break’ difference maker.

Let’s talk about these three elements to successful trading.  After all, if you want to become a winning forex trader. you had better have all three of these critical elements in place.  Think of each element as a leg to a three-legged stool.  This is your trading stool.  If one leg is missing or weak, the stool will topple over.  We’ll talk about each one in greater detail, but here are the three legs to your trading stool:

1. An Effective Trade Method
2. Money Management
3. Trade Psychology

An Effective Trade Method

There are tons of trade strategies out there.  Some are very good.  Many are not.  If you want to learn more about the trade strategy that I like to use, you can find out more about it here .  Most important to those trying to succeed at forex trading is ‘taking ownership’ of a method that is ‘best for them.’  Everybody is different so a little bit of self-analysis is required here.  You need to determine what will best fit within your personal style of trading.  You are not yet required to know this when you’re first starting but you have to be mindful of it.  Usually it comes through a process of elimination.  Here are a few questions you should think about:

• When can you NOT trade?

• Are you patient or not?
• How much capital do you have?
• How much time can you devote to your trading?
• What is your experience level?

You need to think about these things so you can discover the methodology that best fits your needs. Some of it will come with trial and error but you can shorten this part of the learning curve accepting what you can and can not do.

Once you figure that out, you want to look for a method that offers the following key ingredients:

• A strategy that puts the odds in your favor on every trade.
• A strategy that is dynamic to different markets.  Markets change over time.  A good strategy should be able to work on a multitude of markets and forex pairs.
• A strategy that is dynamic to market conditions; usually one that is based on ‘price action.’
• Tradeplans!  Each trade should fit into the context of a greater tradeplan, with complete rules of how and when to use it.  This is critical.  Most traders overlook this ‘must have’ component.  Again, a trade methodology is only as good as the trader using it and the tradeplan is essential.

Money Management

If Methodology is the obvious first leg, then the next important leg of your trader stool is ‘money management.’  Did you know that a great trader can make money with even a mediocre trade strategy?  On the other hand, poor traders will LOSE their money even with the BEST trade strategy.  Why is that?  Usually it is due to over-leverage; putting on too much risk on any given trade.

As tempting as it is, you should never use the leverage that your broker offers.  Knowing how much risk to put on a trade is critical.  Think instead of how much is a responsible level that will keep you solvent in case you experience some losing trades (you will) so that you can stay with the trade methodology and continue to follow the money-making tradeplan.  Taking the next trade in the plan is critical if you hope to let the odds work to your favor.  We don’t make money if a trade or series of trades wins or loses.  We make money from the EDGE that the strategy/methodology gives us over time.

Much is written about money management and it can be very sophisticated.  To keep it very simple, here is the ONE critical thing you need to adhere to with your money management.   USE SMALL RISK!

I recommend that you keep your risk between 1 and 2% of your available trade capital on any given trade.  That means from your entry to your stop-loss (the price level when you just have to admit the trade was wrong and exit with a pre-calculated loss), the amount you risk should be between 1 to 2% on average.  As you grow your account, the position size will grow but it should remain within this risk ratio.  This will certainly help you sleep at night and keep you out of trouble when your plan hits a momentary set-back, as they all do at some point.  The winningest strategies will put together a string of losses at some point.  What’s important is that you are not shaken out of a winning tradeplan due to the natural drawdowns that take place within a winning, money making strategy.

Trade Psychology

That leads me to the 3 rd leg of the stool, trade psychology.  Much has been written on this subject and I’m not going to rehash it all here.  So let me give you a few nuggets that have really helped me out over the years:

1. Make sure you’re trading for the right reason.  To make money should be the only reason.
2. Check your actions and make sure they reflect your reason for trading.  If they do not, then you need to stop trading until you figure out why!
3. Understand that to make money, you have to give your tradeplan a chance to work.  Money is made from the EDGE that you have in the market.  Winning more than you lose on a consistent basis.  Let the odds that your tradeplan gives you, do the heavy lifting.
4. Learn how to take the pressure off of yourself by just ‘leaning on the system.’
5. Take ‘internal ownership’ of your tradeplan.  This can only be done by backtesting your strategy.  You have to witness wins and losses AND how your tradeplan makes money despite the losing trades.  This is called building your belief structure and is the basis for a strong foundation from which to place your trade stool on.
6. Practice, practice, practice!  Make sure that you do not make execution errors or mistakes that are avoidable.  Strive to trade perfectly by following the rules of your tradeplan without error.
7. Set achievable goals and reward yourself when you reach them.  A reward could be paying yourself, increasing your position size, adding another pair to your repertoire, etc.

I realize that there is a lot here to think about.  It was not my intention to over simplify successful trading.  Trading IS simple but it is never easy.  YOU can be successful at it if you just keep things simple in your mind and focus in on the 3 legs of your trader stool.  By doing so, you will put yourself in a better position for success than 90% of the traders out there and those are darn good odds to put to work in your favor.

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