The 3 Pillars To Successful Trading
Updated: Nov 1
In today's newsletter, I am breaking down the 3 foundational pillars that you need to focus on to become a successful trader.
If one of these pillars is missing or weak then your whole trading will crumble. So if you want to perform 10x better than 98% of other traders, read and make sure you are working on them.
What Are The 3 Pillars?
The 3 Pillars Of Trading
Strategy
Risk Management
Psychology
Miss one of these and everything will crumble...
Each pillar is important in its own right and without one everything falls. But each has its own amount of work and effort required.
Breaking it down:
If I had to break it down I'd say
Strategy is 10%
Risk is 20%
Psychology is 70%
The first two are really a matter of just putting in the work to learn and understand. The last one psychology however is the hardest and what essentially holds the majority of the 3 pillars together.
Without the right mindset, you won't be able to follow your strategy and will disregard risk when the time comes.
This is why I am a big advocate for working on psychology and why I wrote my book 'The Blueprint To Trading Psychology.'' to help traders overcome their mental obstacles.
You see strategy and risk are like a car but psychology is the driver without the driver it becomes irrelevant how good the other two are. It won't drive without the right operator who knows how to handle it.
The Strategy is the car, the Stop loss is the seatbelt and the skilled driver is psychology.
Strategy:
You need an edge so you MUST:
Research
Backtest
Forward Test
You have to verify it works!
Strategy development is essentially the first step, create a system that you are compatible with and go through the multiple testing phases to confirm you have a positive expectancy. It's the vital first stage of the process.
Risk Management
Manage risk this way you'll have:
- Small Losses - Big Wins
Instead of 95% of failing traders:
- Small Wins - Big Losses
Risk is the next part, you need correct position sizing to let the probabilities work and help you stay in the game. Risk management works in 3 parts. Before, during, and after.
Before is how much you risk during is how much you keep, and after is an assessment of whether you need to reduce or increase based on how you have performed.
Psychology
If you want to be able to:
Follow the plan
Not self-sabotage
Remain cool under pressure
You need to work on your mindset.
Or the previous pillars become useless.
Psychology is the glue that binds everything together. You need to be able to execute and follow the plan. As you trade you will begin to feel sorts of emotions you never expected and this is where most traders fail or give up due to no understanding of what's happening.
You need to learn what your emotional triggers are, understand why you have them and implement ways to not let them negatively affect your trading.
Most traders are focusing on the wrong thing
When going through the psychology stage, traders often try to find outside sources to take the blame for their lack of results
More indicators
More monitors
More strategies
And think this is the key to fixing their trading.
But the truth is it's usually because one of the three pillars is off whether that be no positive expectancy, no understanding of risk, or their psychology is not yet ready.
The real reason their trading is failing is that one of the 3 pillars is weak and needs strengthening.
When you break it down to just these 3 pillars then you can begin to speed up the process to success. By consistently working and reviewing these 3 things you can now begin to move forward.
If you want to see how I put the 3 pillars into practice, watch my free video here. It shows how I trade with simple rules in about 10 minutes a day.
Final Thoughts
Focus on the 3 pillars and the rest will fall into place. It takes time and effort to master but so does anything worth doing.
Remember:
Use a strategy to have an edge.
Use risk to stay in the game.
Use psychology to play forever.
Quick answers
What are the 3 pillars of trading?
Strategy, risk management and psychology. Each one matters in its own right, and if one is missing or weak the whole thing can crumble.
Which pillar of trading matters most?
Psychology. I'd put it at roughly 70%, with risk at 20% and strategy at 10%. Without the right mindset you won't follow your strategy and you'll disregard risk when it counts.
How do I know if my trading strategy has an edge?
Research it, backtest it and then forward test it. Go through each testing phase to confirm it has a positive expectancy before you rely on it.
Why isn't adding more indicators fixing my trading?
Because more indicators, monitors or strategies rarely fix the real problem. It's usually that one of the three pillars is weak, whether that's no positive expectancy, no understanding of risk or a mindset that isn't ready yet.
Enjoy your day,
Alan
Want more like this?
I send one short email a week on the mental side of trading and keeping it simple. No hype and no signals. Join the free newsletter here.
Two more ways I can help, whenever you're ready:
Watch the free video on how I trade in about 10 minutes a day with simple, rule-based swing trades on the daily chart.
Read The Blueprint To Trading Psychology, my short book on why you break your own rules and how to stop.
About Alan
Alan Edward (The Divergent Trader) is a full-time trader. It took him about five years to get consistent, and he now teaches a simple, low-screen-time way to trade, plus the mental side that goes with it.
Trading carries a high level of risk and you can lose money. This post is for education only and is not financial advice.
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