- emotional discipline: a trader must have discipline to sit on the sidelines when conditions are not perfect to take a trade. We want to take trades only when they are as obvious as walking up to a table and picking up the bills. A lot of preparation and training goes into the development of a high-probability trade, and therefore we should not settle for a mediocre setup. My philosophy is to wait patiently for the next one and then strike with force. There is always a "next one".
- discipline to follow trade rules: a trader spends many hours in the trenches studying and identifying repeatable patterns. He knows intellectually what works and what doesn't. So why, then, would a trader abandon his rules in the midst of the battle? The only excuse I can think of is the all-powerful fear/greed psychology. These two states of mind can cause a trader to go berserk at exactly the wrong time. So that is why it is critically important to have a written set of trade rules and to discipline oneself not to deviate from them, no matter how sexy the market looks or how scary it may seem.
- correct position sizing: aside from the obvious ingredients above, there is a mathematical requirement as well. In addition to all of the technical analysis that traders are so good at, and the emotional control we hope they can maintain... there is also a statistical probability that must be constrained. No matter what happens in a trade, the trader should ensure one thing above all else: that he will live to trade again the next day. Therefore, a key ingredient to success is that each trade be boxed independently in such a way that it could never destroy more than a measured amount of the trader's account. One way to do this is to pre-identify the maximum risk of each trade setup prior to entering the market (this is also the way I trade). Knowing this certainty allows a trader to control risk, or possibly decide if the trade setup is even worthy of committing funds at all. Sometimes the chart analysis looks great on the surface, but when you crunch the numbers you see that visuals can be illusions. For example, my trade rules dictate that I will not take trades yielding less than a 2:1 Reward Ratio. That means for each dollar I risk, I expect to make $2 or more (otherwise I won't take the trade at all).
In the meantime, I've abandoned my (outdated?) spreadsheet in favor of a more accurate online calculator I found (see link to the right called Free position sizing calculator).
This calculator is great, but does not support the concept of a micro account. Because I trade with conservative risk only (currently 1%), I prefer to take advantage of my broker's micro lot feature, which allows me to gear trades all the way down to pennies. One way I found that this can be accomplished is to multiply the account equity by 100 and then divide the resultant lots by 100. The broker I use allows a minimum micro lot of 0.01 which equals 1 penny USD.
