The Three Elements of Successful Trading

Any successful trading program must take into account three important factors: price forecasting, timing, and money management.

1. Pricing forecasting

price forecasting indicates which way a market is expected to trend. It is the crucial first step in the trading decision. The forecasting process determines whether the trader is bullish or bearish. It provides the answer to the basic question of whether to enter the market from the long or short side, If the price forecast is wrong, nothing else that follows will work.

2. Trading tactics, or timing

Trading tactics, or timing, determines specific entry and exit points. It’s quite possible to be correct on the direction of the market, but still lose money on a trade if the timing is off. Timing is almost entirely technical in nature. Therefore, even if the trader is fundamentally oriented, technical tools must be employed at this point to determine specific entry and exit points.

3. Money management

Money management covers the allocation of funds. It includes such areas as portfolio makeup, diversification, how much money to invest or risk in any one market, the use of stops, reward-to-risk ratios, what to do after periods of success or adversity, and whether to trade conservatively or aggressively.

The simeplest way to summarize the three different elements is that price forecasting tells the trader what to do, timing helps decide when to do it, and money management determines how much to commit to the trade.