4. The 3 Pillars of Successful Trading

One of the first things you learn when you begin trading, and as you saw in the self-evaluation, is that there are three main areas of focus for the trader: Methodology, Money Management and Mindset.

I’m not sure how obvious this is to you at this point, so excuse me if I’m hammering you over the head with it:

The biggest single mistake that beginning and losing traders make is…

to place much too much importance on their methodology and much too little importance on money management and mindset.

I strongly believe that this misunderstanding was the greatest contributing factor to me being a losing trader, and it was only when I finally got it that things began to change . When I lost money I always redoubled my efforts at practicing trading my method. I thought "if I can only trade my method properly, I"ll be fine". What I didn’t understand is that in live conditions there are so many "other factors" in play that if you don’t have the mindest and the money management, you will repeatedly be thrown off in your ability to execute your method.

What’s suprising, and its true for many losing traders, is that we’ve heard it said many times, and yet we persistently disregard it. I know that for myself, for at least the first 5 years of trading, I believed that method was the magic and that the other two were ‘add ons’.

On average losing traders spend about 70-80% of their effort on practicing and refining their methodology and only 20-30% devoted to the other two.

The reality of successful trading is that it is approximately 80% about mindset and money management and only 20% about method . You can have a completely crap method that loses 50% of the time, and yet as long as you have the right money management and the right mindset you can still be profitable overall.

So if you get one thing as a result of reading this entire blog I would wish this for you - don’t blow this statement off, it’s key to your success.

Money Management and Mindset are much more important to your success than your method.

Can you imagine someone that wants to take up racecar driving competitively. They’ve been told by the experts that the three things they need to focus on at the beginning of their career are - getting a fast car, learning defensive driving skills so that they can stay the course, and a tough mind.

However the person puts all their effort and attention into getting the fastest car. They are convinced that this is what will make them most competitive, only they discover that each time they go out to race they spin off the track. Its only after this happens for the 10th time that they begin to understand why defensive driving and mindset are also important. If you don’t have the ability to stay on the track, what is the use of a fast car?

So here’s something to think about. How much time are you giving to the three pillars of trading? Do you need to make an adjustment and give more time to money management and particularly to developing your mindset?

Next blog post: How clear are you about your trading methodology?

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