Trading strategies, systems and methods always look great on paper, but when it comes to investing in the real world, market chaos and unpredictability often render even the best trading strategies unsuitable for the task. The hard truth that all traders end up learning sooner or later is that trading is much more difficult when your chips are down and the pressure is high, even if you have a very effective trading strategy.
While the trading method you use is extremely important, it is simply not enough in itself. There are basically 3 main keys to success in trading: Mind control, risk management and strategy, and if these 3 keys to the puzzle aren't operating correctly, you're going to be like a lost sheep, lacking long-term consistency in your trading.
Please note that even though I said that an effective trading strategy isn't enough, I'm not at all suggesting that you don't need a good strategy, because it's obvious that we need to an effective trading advantage in order to enter into trades that have a high probability of success. However, if that is all you're looking for, you'll find yourself broke, poor, bankrupt and depressed, because the other two components - mind control and risk management - are just as important as your trading strategy.
If you don't have the right frame of mind, the best trading strategy in the world won't help you. Many traders have a too poor frame of mind to succeed in the market. They are mesmerised by the amount of money they can make if they use a good trading strategy. Most new and struggling traders think this way, and it is this type of thinking - worrying about the amount of money they can make - that literally causes them to lose money.
Succeeding in trading is an art and a skill, and unless you're firing on all cylinders - having the right attitude for trading, using risk management and having a good method - you won't succeed. When we have real money at stake, it triggers our emotions, and the more money you risk, the greater your emotional reactions. Therefore, the easiest and most effective way to keep your emotions in check (and to make sure that the "mental" component favouring successful trading works properly) is to properly manage risk on each trade.
Managing your risk properly will help you achieve an appropriate trading mindset, as it will keep your attachment to specific trades low and will help you ignore the feelings you have after losing or making money. However, this is unfortunately not the only piece of the mind puzzle. Traders often tend to overdo it, even if they manage their risk properly. So, if you really want to be sure that you're mental component is in good shape, you just need to practice proper risk management, but you also need to have patience and discipline to follow your trading plan/strategy. You also need to know how to trade in times of market uncertainty and volatility and not become obsessed with economic news.
Risk management is the next element we need to examine. All traders know this aspect of trading, but few want to discuss it or be honest with themselves. After all, dealing with the fact that you should risk only €1 per pip because you only have a trading account of €2,000 isn't really something that excites many traders. But, the reality is that if you don't practice good risk management, you'll never succeed in the markets, even if your mind and your method are in good shape!
Proper risk management makes controlling your mind and your emotions much easier. In other words, risk management is like the "glue" that keeps everything together in your trading. If you don't have good risk management, your mindset will probably not be calm and consistent enough to make money, even if you've mastered your trading method.
New traders often understand the importance of risk management, but due to greed and other emotional mistakes, they think they can get away by postponing its implementation to a later date after having earned X amount of money on the market, and that day never comes. Whether you have an account with €1,000 or £1,000,000, if you don't manage your risk properly, you will never make money in the long term, even if you have successfully mastered your mental attitude and your method is solid.
The method, strategy or trading system that you use is obviously important, but as I mentioned earlier, it won't reward you like it's supposed to if you don't have your mindset and risk management skills in proper order, so keep that in mind.
I am a big proponent of simplifying strategies, simply because it makes sense and it works. In addition, trading with a simple method has a very positive effect on the mind and risk management.
Traders who invest using strategies or systems that require them to have a bunch of indicators and nonsense stuck all over their charts are also generally over-analysing their trading and thinking too much. This is obviously a problem for the mental side of things.
One's mindset, risk management and one's strategy are all interconnected. They must always be properly operating, this is the closest you can get to finding the "Holy Grail" of trading.