10 Pathways to Trading Success

There are many paths to trading profitability, but all the paths have similar steps. Here are some important steps you must follow on your path to profitability.

1. The amount of success you have in trading is primarily based on the amount of homework you do.
2. You must develop a winning trading system that is based on previous price history, trend capturing in your time frame, and great risk/reward setups.
3. You must have a quantified trading plan for executing your system with real time entries, exits, and position sizing.
4. Position size so you never take big losses. Never let any trade risk the ruination of your account.
5. Learn from those that have consistently won in the markets.
6. Read the best trading books ever written.
7. Study a market’s price history, and how it related to technical indicators.
8. Study historical chart patterns.
9. Be aware of your emotions and ego so you can continue to trade based on facts instead of how you feel.
10. Perseverance pays in trading. Let losses be lessons and your mistakes be your teachers. Don’t quit when you’re frustrated; keep going until you are successful.

Trading Expectations: Keep It Real

Consistently profitable trading requires a winning system that fits a traders personality, and they must have the discipline to follow it Implicitly.

Here are a few things that a new trader needs to understand:

1. No trader wins on every trade. The best traders in the world only have a 50%-80% success rate. 
2. Trying to get rich quick requires so much risk, that the probabilities of ending up poor is far greater than your chances of becoming rich. 
3. Consistent 15% – 20% annual returns are what world class traders and portfolio managers make.
4. Some of the best traders’ best years were 50% – 100% annual returns, in specific market conditions, that were conducive to their strategy.
5. Market conditions will have a huge impact on your returns each year, regardless of how you trade.
6. The higher returns you aim for, the more risk will be required, and the larger draw down you will have getting those returns. 
7. If you risk 5% t0 10% of your trading capital on every trade, your risk of ruin is 100% in the long term.
8. If you think that the above percentages are just too small, then it is very likely that your trading account is too small to make those percentages meaningful.
9. To trade for a living, you likely need a multiple six figure account, and a minimum of one years worth of living expenses to avoid the unrealistic expectations of small returns and the accompanying stress.
10. Trading is a profession like any other, and requires the same level of discipline and dedication to be successful.
11. All your profits comes from other trader’s losses. You must beat other traders to be profitable.
12. Trading is the hardest easy money you will ever make.

The Biggest One Thing that Separates losing traders from the Winners

Making money in the financial markets is not only challenging but just surviving an account blow up is also a win for many new traders. There is one thing that ultimately determines your success in the markets. It is not your stock picking skills, your trend following or even trading a robust method. The dividing line between the winners and the losers in trading and investing is risk management. If you trade all in and risk it all over an over you will eventually blow up your account, and the funny thing is that it will likely be on your ‘can’t miss’ trade that is just way to obvious to everyone and is a crowded trade. Traders that believe have 10 losing trades in a row are impossible will discover it is very possible. Each trade should be large enough to return enough to make it worth your while, but small enough to make it inconsequential to your results in the long term. Trading small not only eliminates the financial risk of account ruin that is ever present in a market environment that is not conducive to your methodology but small risks also keep your logical brain in control of your trading and your emotions on the side lines.Nothing is more painful in my opinion than to build up an account during a great string of wins only to give it back with a string of losses in a different market environment. Small bets and staying out when he market waves get wild is a great formula to avoid big draw downs. You can still win big when you are right by letting a winner run but always lose small when you are wrong. The bet size on each trade will make or break ever trader at some point usually sooner than later.

You want to trade better? Trade smaller. You want less draw downs in capital? Trade smaller.You want to survive? Trade smaller and more carefully.

“At the end of the day, the most important thing is how good are you at risk control.” -Paul Tudor Jones

The 10 Trading Commandments

1. Thou shalt have no opinion other than price action.
2. Thou shalt not make for yourselves any prediction, forecast, hope, or fear that causes you to trade against the market’s trend.
3. Thou shalt not deviate from your written trading plan or trading rules.
4. Remember your original stop loss to keep your losers small. 
   
5. Honor your entry and exit signals so you can trade long term and enjoy profitability. 
6. Thou shalt not risk ruin by trading a position size that could destroy your account after consecutive losses.
7. Thou shalt not deviate from your trading style and methodology.
8. Thou shalt not steal trading ideas, for  you do not know their position size or time frame.
9. Thou shalt not make trades based on opinions or emotions but rather based on quantifiable facts.
10. Thou shalt not covet other trader’s returns, methods, or winning streaks. Each must trade what fits their personality, and follow their own path to trading profitability.

Cardinal Sins of Trading

Are you guilty of one of the cardinal sins of trading?

Hubris: A foolish amount of pride or overconfidence. No matter how good of a trader you think you are, the market is always bigger. You will not win an argument with its price action no matter what.

Fear: Cutting winners short because of unwarranted fear eliminates all the big wins. Being afraid to take a good entry creates loss of a potential profit. Thorough trading methodology study is required to trade confidently.

Ego: The desire to be right more than the desire to make money leads to losing a lot of money. The ego causes traders to hold losers far too long. The best traders are slaves to the market’s price action.

Laziness: Seeking to be given trades instead of doing the work to develop a system leads to failure. Trades only have meaning when they are executed within a robust system complimented by discipline and risk management.

Greed: The greedier a new trader is, the higher the probability and speed at which they lose their whole trading account. There is significant risk in going for trades with big position sizes, because the losses can be huge if when wrong.

Money is made in the market through self-discipline and trade management. If a trader does not manage risk and position sizing, their winning trades are meaningless because they will eventually give it all back. Without overcoming the sins of hubris, fear, ego, laziness, and greed, a trader is unlikely to make it at a professional level.

10 Ways To Get Trading Profits Flowing in Your Direction

Every day crores of rupee flow from trader to trader, from market to market. Many traders are just happy to dip their bucket in and take a share each day for themselves. But where does the money flow? Every day options lose time value, options sellers blow up, shorts cover for a loss, trends take place, people lose, people win, but who walks away with the pocket full of cash. When the stock market crashes their are people sitting in cash that kept their profits and short sellers making more money. On the day options expire there are many option buyers that are holding worthless options and others forced to buy them back for a loss. Opportunities abound, who are the 10% who consistently capitalize on these opportunities?

 

1. Capital flows from those who fight trends to those who follow them.

2. In the long term money flows to those who manage risk and are able to hold on to their profits from those who don’t manage risk. 

3. Traders that persevere through the learning curve stick around long enough to make money from those that just trade with no understanding of what they are doing.

4. Robust systems take money from traders with no edge over the markets.

5. Traders that trade price action take money from those that trade opinions.

6. Traders that enter a trade based on a reversal signal make money form those that stubbornly hold on to a losing trade and hope.

7. Money flows to those who let winners run from those that hold losing trades and hope.

8. Capital flows from those that trade a winning methodology from those that trade on emotions.

9. Those with big egos pay a price to try to prove they are right by holding a losing trade those that admit they are wrong quickly keep hard earned profits.

10. Money flows from those who do not know how to trade to those who do.

The Reason Why You Can’t Cut Losses And Let Winners Run

In amateur tennis most points are won by errors of your opponent and not by your own skill.

The statement above resulted from research and statistical analysis of tennis matches and the idea behind it applies to trading as well. As a trader, especially in the beginning, you don’t have to try to make everything perfect and pay attention to every little detail. In order to survive and build a strong foundation it is much more important that you focus on not making big mistakes that could result in substantial losses. Things on that list include:

• Use a stop loss and stick to it.
• Have a trading plan and follow it. Trades that are not in your plan are not there for a reason.
• Use appropriate risk management. A single trade should not have any major impact on your account balance, positive or negative.

Profits, losses, threats and rewards – We are just monkeys

Holding on to losing trades and selling winners too early result in a skewed risk reward ratio and unprofitable trading results. Holding on to winning trades is psychologically challenging because your unrealized profits could evaporate completely and unrealized losses could still turn into profits.

But the problem goes much deeper. Historically, in order to survive our ancestors had to treat threats and opportunities differently. Losses are threats and we try everything to avoid a sure loss, even if it means gambling and possibly losing much more. In contrast, profits and gains were taken much faster and receiving a sure profit is preferable than gambling to gain a lager reward.

This behavior still exists today and is deeply ingrained in our DNA. Therefore, not cutting trading losses and closing winning trades too early is hard to overcome and a problem traders have to actively work on. A structured approach and regularly reviewing your trading performance is, therefore, a key to your success as a trader.

Word of caution: Don’t go for homeruns

The opposite effect, when traders let winners run too long and hope to land the one big homerun trade that will finally equalize all past losses, is equally dangerous. Most of the time, when traders widen their take profit orders in the hope to make more money than originally planned, they will give back their profits when price reverses. Needless to say that this behavior also ruins the long-term expectancy of your trading strategy.

Conclusion: Increase your performance by overcoming evolutionary hurdles

If you struggle with letting winning trades run, you are not alone and it’s not exclusively your mistake. However, don’t use this as an excuse to keep on making the same mistakes over and over again. Closely monitor your trading activity and how you interact and actively manage your trades. Even better, don’t touch your stop loss and take profit orders after you have entered your trade unless you see valid reasons.