Keys to Trading Success 

Ever wondered what it takes to succeed as a trader?

Hundreds of books and articles have been written about this topic, and they invariably boil down to these three points.

Money

Having sufficient capital is the first requirement of successful trading. Beginners enticed by advertisements making ridiculous claim that you can trade successfully with as little as $5,000 will ultimately find out that transaction costs and the tendency to over-leverage due to the small capital are deadly pitfalls.

It just does not make financial sense to trade when brokerage fee or trading spread alone erodes a sizeable percentage of your capital in each trade. It is an uphill task just to break even in the long run.

So what is the minimum trading capital one should start with? The consensus is that you need a minimum of A$30,000 to A$50,000. This will allow you to make 3-5 trades in lots of $10,000, without leverage.

If you don't have sufficient trading capital yet, there is no hurry to jump in. The markets will be there tomorrow and the days after. Invest what you have in longer-term opportunities and save up to accumulate your target capital.

Motivation

Having sufficient trading capital is only the first step. You also need strong motivation to succeed in the business of trading.

We are not talking about the heat-under-the-collar-type of momentary desire to become a millionaire overnight. We are talking about consistent and sustained motivation to achieve a realistic goal.

Ask yourself what you intend to get out of your trading activity. Set yourself realistic goals and stretch goals, both in the short term and in the long run.

You need to be motivated and keep motivated to learn, to be disciplined, to keep good records, to dutifully scan the markets for opportunities, and to keep on fine-tuning and adjusting your trading activity according to varying market conditions.

Method

The final piece of the puzzle is method. Method refers to the broad processes of determining your specific trading criteria, scanning the market for trading opportunities, determining sensible entry and exit for each trade, managing open positions, and keeping records for learning and performance measurement purposes.

There are many ways of making money from the markets - from day-trading to swing trading, from a trading system that relies only on fundamental analysis or technical analysis to one that encompasses both.

Although successful traders use different trading systems, what all of them agree is you need to customize your trading style and system according to your personality and personal circumstances.

For example, if you work 9-5 and couldn't monitor the market during trading hours, it would be suicidal to daytrade. Swing trading may be more suitable for you.

If you are someone who has a natural aversion to losses, you will need to customise your trading system to take small profits from low risk trades, instead of huge profits from more risky opportunities.

Summary

Contrary to what many enticing software and newsletter advertisements would have you believe it, making consistent profits from trading is not an easy task.

Although not easy, trading can be a good way of making lots of money, without the downside of working for someone else. Many people have succeeded in doing this all over the world, and never looked back. They all have a common characteristic - they are equipped with the 3Ms (Money, Motivation and Method). If you are aspiring to become a profitable trader, you now know what you need to succeed!

Written by
Austin Hui, MBA CPA
Senior Investment Analyst

This article was first published in the November 2007 edition of TRADING DAY magazine http://www.tradingday.com.au . TRADING DAY is a free electronic magazine for Australian investors and traders. Subscribe online at http://www.tradingday.com.au .