The dream of every trader is the become a consistently profitable (CP) trader. Being CP implies that you make money more than you don’t. This doesn’t mean you won’t have losses, because you will. However, being able to consistently extract money out of the market allows you to accomplish your goals of a trader. Whether you trade Stocks, Futures or Options there are some very important mechanics and habits that all CP traders follow. These habits and mechanics can have an immediate positive impact on your trading.
Have a Trade Plan
Randomly buying and selling the market is guessing and is consistent as gambling at a casino. Therefore it is crucial to develop an edge in your trading that has a positive expectancy. This means it has a higher probability of working than not. This will take some work to identify, but it will be well worth the effort. The plan can include the market you will trade, the time frames you will execute on, the actual setup and trigger, and risk identification. This plan will keep you out of the market when it is beneficial to you as outlined in your trade plan. By far, the number one reason we see people lose money is that they are randomly taking trades, in other words, they are guessing.
Manage Your Risk
There is an old adage; cut your losses quickly and let your winners run. Makes sense, right? It is but is amazing how little people adhere to this adage. Most traders focus on their entry and how much money they can make, assuming they have a plan. However, before CP traders enter a trade, they identify the risk. Yes, it is important to identify how much they will risk making their profit. This is where the adage comes back. Cutting your losses quickly means having a stop that is less than what your profit targets are. This allows you to cut your losses quickly and let the profits run. The chart below shows an example of how the risk-reward can look. In this case, the trader is risking 13 points to potentially earn 39 points. This is almost a 1:4 ratio. Even is if the trade has more losses than winners, she has a chance of being profitable merely to keeping losses small.
Reviewing your trades daily, weekly, or monthly is very important. Most will not do this because they are afraid! Afraid of what? Being wrong. As humans, we trained through school and families that being “right” is important. And in some cases this correct. I wouldn’t want an engineer to be wrong on an airplane they are designing, especially if I am flying on it. However, in trading, being “right” is a kiss of death, and being able to admit you are not “right” when you lose a trade is a major step to becoming CP. Reviewing your trades on a regular basis provides you a view of your thought process while taking the trade and it allows you to see if you are following your plan. There are a few things to consider when you are reviewing trades.
- What was the trade you were taking?
- Did you follow your rules?
- Did you have a good risk-reward?
- How were you feeling during the trade (anxiety, nervous, relaxed)
- What could you have done better in the trade?
You can add to this list but this is a great place to start.
This seems obvious but executing according to your trade plan is crucial to becoming CP. When you review, you will see if you are executing your trades. Focusing on executing and managing your trade is not as sexy as thinking about how much money you will earn on the trade. Money is the byproduct of executing your plan. Let me say that again, money is the by-product of executing your trade plan. Turn your attention away from the money and execute will have a huge impact on your way to being CP.