Five Essential Building Blocks

Steven L. Miller writes a column for Stocks, Futures, and Options Magazine where he takes questions from readers. In this month's "Ask Slim" column, he takes a question I also receive from quite a few readers:

"What makes the crucial difference between successful, profitable, professional traders and unsuccessful traders? Can an individual trader emulate the professional trader and be profitable and successful also? What are the ingredients needed?"

I like the way he responds to these questions and I agree with his reply:

"I have seen people with vast differences in personalities and backgrounds do very well as traders. I don’t believe there is a single crucial difference between successful and unsuccessful traders." He then goes on to equate trading with the golf swing. "There are many elements that need to be in balance just to get that tiny head at the end of the club to hit that little ball. Then you need to learn how to get the ball to land where you want it to go, without hitting the trees, water or sand (expletives omitted). It is quite a challenge and takes years of hard work."

Steven then provides what he calls the "Five Essential Building Blocks to Successful Trading." They are:

1. Define a healthy “role” for trading in your life. Often traders struggle because their motivation for trading is about solving problems in their lives. “I need to make money to pay for my child’s college or to leave the job I hate.” It should be about staying within your own “trading map,” making trades because they fit within your method and are determined by your analysis.

2. Build “emotional fitness.” Our emotions may prevent us from maximizing trades or cause us to stay too long with a loser. Much of what drives us as traders is not related to trading. You need to discover these roadblocks and the emotions they trigger.

3. Your choice of markets, trading style and method should be in balance with your personality and financial conditions. If you are risk averse and have a $5,000 trading account, it will be hard to be successful trading volatile markets like the eMini NASDAQ or crude oil.

4. Discipline! This is the most overused and misunderstood word in trading. It goes well beyond just keeping your losses small. It encompasses your learning and research, mental preparedness each day, physical condition, trading environment and more. It’s hard to do this alone. It helps to have a support system; people you trust with whom you can share ideas and who will hold you accountable. Do you have the discipline to move to a high level of commitment in these areas and execute within your prescribed method and plan?

5. Build a winning formula. You need reasonable goals and the math has to work. So many traders need or expect to have huge returns. It’s not possible to make 25% or even 5% on each trade. If you place a proper expectation on each trade or day or month, depending on your perspective, you will likely handle the positions properly, raising your “batting average” and your overall success.

I couldn't have said it better myself. Does your trading/investing satisfy these essential building blocks?