Both my 1:1 coaching and my consulting clients know my thinking on this. And I know it is very controversial because it flies in the face of what we think we know, and what many trading software, systems sellers, and other vendors want us know. I’m sure some of you reading this will vehemently disagree with me.  That’s fine with me. If what your doing is working, and you’re actually making good money, congratulations. But most traders are not where they want to be.

The dirty little secret that I’m about to reveal to you is very powerful, so powerful that it alone has the power to turn you around.  Likewise, I would go as far to say that it’s something that most will never understand, or maybe they will on an intellectual level, but they won’t ‘put their money’ on it and actually do something about it.

So before the drum roll, I must make one qualification: this applies mainly to pure discretionary traders.  Okay….drum roll……

Here is the ‘secret’: Set-ups are important, but compared to position sizing, risk management, trade management, and psychology, set-ups are the least important part of trading.

Okay, I can already hear my detractors. They’re throwing the old, ‘but you need to have a strategy with a positive expectancy’ at me.  And I say, of course you need some type of an edge. That edge can come in many different flavors. I know more than one successful ES trader that has never back-tested. While I’m not advocating that specifically, I am using that as an example. Some people are pure tape readers and wouldn’t know a statistic if it hit them in the side of the head. We all need confidence in our set-ups, and I’m saying that there is more than one way to derive such confidence. For many traders the confidence does come from stats and back-testing.

There is a caveat here for discretionary traders, and it’s also a corollary to the ‘dirty little secret’. Knowing the ‘win rate’ statistic  for a given set-up is not the same thing as a probability of the set-up resulting in a winning trade for a given trader.  Traders easily fall into the trap of thinking that a set-up with a back-tested win rate of 60% means that if they take that set-up it will produce a winning trade 6 out of 10 times.  Sorry, but the real world of trading doesn’t work that way for a number of reasons, including the individual psychology issues for a given trader, not to mention money management and trade management.  Confusing statistics and probabilities is a common trap that many traders fall into. I  discuss this more elsewhere.

So, the dirty little secret, was it anything like you expected? Do you believe it? Most traders believe that set-ups are the single most important part of trading and they spend most of their time searching for the best one(s). Remember, most traders don’t achieve consistency. Coincidence?   I think not.

Part 2 of the Dirty Little Secret