In this article, you will understand the 4 pillars that sustain the winning trader. The absence of any of these pillars will surely lead you to failure, even if it takes 5 years, at some point, it will break and give up on the market if these 4 pillars are not present.
1) Methodology
Methodology, our first pillar. Contrary to what many think, the trader does not spend their time staring at charts looking for every pattern they’ve ever heard of. Instead, they create a set of criteria that guide their decision-making process. This set of criteria is their operational methodology.
If you think methodology is the same as an entry signal, let me clarify. A methodology does indeed provide some entry signals in an operation. But it also determines how to establish the risk-return ratio, it also tells you how to decide the position size in each operation. Although this starts to touch on the issue of management, the calibration of position size according to the amount of confluences is part of the methodology. The methodology will also tell you what to do on days when there is significant data disclosure for the market. The entire technical arsenal is contained within the methodology.
This methodology can be trend-based, reversal-based, or sideways-based, all part of defining your profile. But the decision-making metrics need to be clear. For example, the targets of my methodology are always with Fibonacci, always without exception. The risk-return ratio of my methodology always needs to be positive, and the stop always needs to be technical. So, if the technical stop is farther away than the next Fibonacci target, I cannot enter the operation because the risk-return ratio will be negative, even if I want to enter the operation, I cannot, my methodology prohibits it.
This would be the part where I would tell you to buy my course because I deliver all my trend methodology and still provide individual support for each student, but you might have a scalper profile, so my Trend method won’t serve. But if your profile is to operate trends, I invite you to check out my course, with lifelong access and direct support from me.
2) Management
Management. What good is having a methodology if you risk 30% of your account in a single operation? That’s why the second Pillar of the Trader is how they manage their finances. There is a quote from a great Trader named Larry Hite that says: if you don’t bet, you can’t win. But if you lose all your chips, you can’t bet.
The balance you deposit with the broker to trade is your ammunition. Are you going to spend all your ammunition on a capybara? And if a jaguar passes by later? You need to have several shots, the more, the better. There are traders who risk only 1% per operation, or in other words, simplifying here, eliminating the issue of leverage, it’s as if the son of a gun had 100,000 reais but only risks taking a stop of a thousand. That’s discipline.
So when Larry Hite says that if you don’t bet, you can’t win, he’s giving you an incentive to take risks, get out of savings, get out of fixed income, but then he adds, “if you lose all your chips, you can’t bet”, in other words, take risks but with management because losing all your chips means breaking your trading account, going to zero, or below that in specific cases where the broker could not close your operation due to lack of margin.
It’s up to you to determine how many percent you will risk per operation, it doesn’t necessarily have to be 1%, it can be 3, 5, 7%. Now you agree that there comes a point, 20% per operation, that doesn’t make sense, it will break. It can withstand 3 years, but at some point, it will break if it doesn’t have a strong management pillar. I have a great management class on YouTube, it’s quite old but worth watching.
3) Behavioral
The next Pillar is behavioral. Even with a methodology and management, you can let yourself be carried away by emotions and end up straying from the method and management. So here are some tips to strengthen the behavioral pillar. First, take a step back and go back to the methodology issue to see if it’s not too subjective. The more subjective your methodology is, the more emotions you will have when trading. So make sure your methodology is objective to give you more support psychologically.
The second tip to strengthen the behavioral pillar: reduce the financial aspect to the point where it’s such a low value that it seems almost a waste of time to keep track of the candles forming. And then gradually increase the financial aspect, but you need to make some operations of 20, 30 reais, with no emotions involved, so that you can later make operations of 20, 30 thousand reais. The more significant the financial value, the more emotions you will have in the operation, that’s a fact.
Imagine someone wakes me up in the middle of the night, shakes my head, “Caio Caio wake up, you just lost 20 reais,” I’m going to say, “Why did you wake me up for 20 reais?” Now, if the person says I lost 100 thousand reais, my heart is going to race. So it’s evident that if you’re operating with a lot of emotions, it’s because the financial aspect is high, it’s not consistent with your current reality. And everyone has their reality, 200 reais for one person can already be a lot, for another 2 thousand, so ask yourself what financial value you are willing to lose.
This number is yours, and nobody needs to know, don’t post values on social networks because it affects the psychological aspect even more. Another tip from this behavioral pillar, the human body is a machine that has certain needs, whether you like it or not, you have to exercise to keep your mind sharp for trading! “Oh but there are traders who are fat.” Very few. The traders I know who are successful maintain a routine of exercises. A sound mind in a sound body. To make Day Trading in high performance you have to have a good mind.
4) Context
The fourth Pillar is the context, what good is everything we talked about if you’re going to blindly enter operations without knowing what’s going on in the world? All markets are interconnected, it is necessary to look at interest rates, gold, dollar, S&P 500. Some people operate without even knowing that it’s a holiday abroad, the liquidity of our stock market is drastically reduced when it’s a holiday in the United States.
That’s because I’m talking about the general context, but there’s also the context of the chart you’re operating on, for example, the mini index was oscillating 500 points, it was already a lot, then out of nowhere, back in 2020, I was trading the pandemic broke out, after the circuit breakers I noticed that the mini index’s oscillation changed completely, the effort it made to oscillate 300 points, now it took a shot of 2 thousand points.
So I paid attention to the context. The technical stops became larger, so I had to reduce the financial aspect to handle those stops.
There were people at that time who didn’t even pay attention to these issues, they come with a ready-made phrase “volatility is a trader’s friend”, okay. But the context of this volatility changed, so I have to adapt to it, adapt to this new context.
Identify the Trend
Al Brooks himself says to pay attention to what kind of market we have on this trading day because yesterday it was directional, today it might be more sideways, if I use a trend methodology and identify that the context is less conducive to my operational, I won’t even trade that day. Let’s head to the beach, get a seafood trio, a beer, tomorrow is another day.
But I want to know which of these 4 pillars you have the most difficulty with, so I can write about that issue.
Check out the video I made about the 4 Pillars of the Trader: