We were speaking to friends today about our adventures in trading and they asked a simple question: What are the major concepts of successful trading? Many people have answered this question so we came at it a little different. If you took all the concepts and made them tangible, what would it look like? Here’s a quick list of how we break it down. Before you ever take a trade, all of this should be developed.
- Trading Plan
- Backtested Strategy
- Risk Management Plan
- Emotional Equity Management Plan
In our case, the most important fundamental component is a process to approve each of these through a Risk Manager. When a new strategy is developed, it must run through an approval process to show it has an edge. Before trades are taken, the daily trading plan must be approved to ensure all the guardrails are in place.
When the trading day ends, the Risk Manager reviews the trades, grades them and a growth plan is put into place. In some cases, if the Trading Plan was ignored, the Risk Management Plan will call for a reduction in the number of trades or size. The point is that the act of trading doesn’t come down to the trader making discretionary decisions. This point contains possibly the biggest lesson.
We are still novices at this and we haven’t earned discretion. This business is about development and growth. You must put up the guardrails that match your maturity level. If you can do this, the future will be bright and you too will join the 10%.