How to Become a Consistently Profitable Trader

Do you ever feel like your trading over the past months or years has been a slow, painful grind? Over your entire trading journey, you’ve only managed to produce slow and inconsistent results. Do you wonder how the hell professionals continue to consistently extract money out of the markets over the long run, and how they’re able to trade without letting their emotions affect their judgment?

In this blog post, you’ll find out the answer to these trading questions in this post.

First, I’ll start by mentioning that the information you’re about to be presented with does not reveal the holy grail strategy or the holy grail indicator. If you’re looking for tips on how to get rich quickly from Head and Shoulder patterns, flags, cups & handles, Fibobullshit retracements, or Ichimoku cloud patterns, please close this window, proceed to follow 99% of the Fintwit traders out there, and pay monthly fees to subscribe to their predictive voodoo analysis.

Instead, what I’m about to tell you has been what 99% of the traders tend to ignore - that is: trading psychology.

Let’s start with this simple concept:

Average traders have a hard time becoming consistently profitable, and ultimately professional because they employ too much discretionary trading. What is discretion trading?

You’re probably doing it without even realizing that what you’re doing is discretionary trading. To understand discretionary trading, we must first understand systematic trading, as discretionary trading is the opposite of systematic trading.

In systematic trading, you have a strict set of rules that just don’t bend, no matter who, what, when, where and why. You have a system that you follow, and you let this system make all the decisions for you, while you sit back and relax (figuratively, if you don’t have an algorithm doing it for you).

However, in discretionary trading, you trade based off of biases and emotions that randomly form here and there at any time — essentially, you’re not following a set of rules, not because you don’t have any rules set, but simply because you either don’t have the discipline to follow it, or you believe that certain noise around you matters. You think things like:

  • Is the Fed going to have an announcement? Yellen could screw with the interest rates, but then again, the market might not care…
  • Have I made enough money on this trade that I should take off some to lock in profits because I’m scared of losing my gains?
  • Wait, I think that’s a head and shoulders forming? I should get out of my long position, even though it wasn’t part of the original plan.
  • Is Dennis Gartman bullish on crude in Yen terms, because if so, I should buy some protection on the downside.
  • [Insert generic Fintwit trader] suggested [insert any stock] is way too overbought and overvalued, so I’m going to go balls-deep short on this stock.

Although you might take a trade based off of some initial rules, throughout the trade, you bend these rules based on the subsequent emotions that come up. However, these emotions ultimately affect the way you can be consistently profitable, because there are infinite variations to your emotions at any time in the market, and if you let these multitudes of variables affect your trade throughout its duration, the only consistency you’ll be guaranteed is inconsistency.

So how can we guarantee more consistency? How can we eliminate the emotions from affecting our trade? We need to start from a fresh slate. Here are the top tips to help you become consistently profitable in trading.

Simplify

Seriously, KISS. How many times do you see someone stare at charts that look like seismographs, with Fibobullshit retracements, Brochastics, and Ichimokus, looking for those Cloud 9 setups? And then when the patterns play out in hindsight, they boast about it and say those things matter? That is similar to some fundamentalist telling you that $NFLX is overvalued and on any selloff, they boast about how those things matter. Look, at the end of the day, the only thing that matters is price, because that makes you money. Price is the ultimate source, so just go directly to the source. Ignore everything else - all the noise, all the lines. They’re just confusing you and causing analysis paralysis. If you dumbed down your system to something really simple, you lessen the variables that’ll affect your trade, and you increase the chances that you’ll actually follow every step of your system. You’ll end up going from “If the RSI says oversold, and, if the Ichimoku clouds line up or we’re at a 38%/50%/68% Fib retracement, then I’ll go short” to “If the slope of the 200MA is down, then I’ll go short.” Do you see how much more simple that becomes?

Understand Expected Value

You won’t believe how many people out there still think that the way to make money is through “high probability trades.” High probability trades don’t mean jack squat. Unfortunately, popular services like tastytrade promote this concept all the time. Why doesn’t high probability work? Well, you can have high probability with low profit trades, and low probability with high loss trades.

Think about it - let’s say your win rate is 90%. Every time you win, say you make an average of about $50. Your loss rate is 10%. Every time you lose, you hold and pray that it will eventually come back in your favor, but it doesn’t, so say on average for losers, you lose $500.

This brings us to the concept of expected value (for the mathematical: http://www.mathwords.com/e/expected_value.htm). When you backtest your system, make sure you consider Expected Value rather than just Probability. So if you find a system with 20% chance of success (80% chance of failure), but every chance of success makes > 4R while every loss is 1R, then you’ve got yourself a system that wins in the long run.

The concept of expectation in trading is covered in huge detail in the book Trade Your Way to Financial Freedom, by Van Tharp, which we highly recommend getting.

Trust Your Edge, Follow Your System

This means respecting your system. Staying emotionless. Follow your plan. If your system tells you to cut your losers, then cut them. If your system tells you to adjust your stop, then adjust it. If your system tells you to add to your position, then add to it. If your system tells you to enter, you enter. But if the system isn’t telling you anything, don’t do anything! Don’t be enticed by every little tick the market makes and think that you have to place a trade or muck with your position - remember that the less you trade, the better. Your account is like a bar of soap - the more you touch it, the less you have of it. And you wouldn’t need to trade more than you needed to if you just followed your system.

Every time you don’t follow the system, punish yourself. Every time you do follow the system, reward yourself. You absolutely need to do this. We’re creatures of habit. We like rewards. We hate punishment. When you punish yourself, actually punish yourself. If you’re lazy, run a mile. If you hate your mother, pick up the phone, call her and talk to her for an hour.

What you should not do is reward yourself based on your P/L. You’re trying to promote good habits, which in turn bring the results your system determines it brings in the long run. So focus on the process, and reward yourself every time you are aligned with your process.

One big way to keep emotions at bay is to size your positions in such a way that if you were to lose R, you wouldn’t be tripping out about the loss (even if the trade were to eventually go your way and then some)

No Ego

Don’t bother going on social media, StockTwits, telling people that your call was right and theirs was wrong. Just stop - you’re not here to prove that your dick is bigger than someone else’s. This isn’t some measuring contest, so you have to get rid of that penis envy mentality. Instead, focus on yourself and your journey, and do not compare yourself with others. When trades don’t work out, admit that you’re wrong and stop holding on to the loser (though if you had done your homework and followed your system, this wouldn’t be a problem). You have to get rid of that “need-to-be-right” bias.

As you start to work on all of these areas, you’ll find that you’ll begin to care less and less about trading. In fact, trading will probably start to become boring. You don’t care what anyone else thinks or says. Trading becomes as simple as black and white. Enter, or hold, or exit. No more Fed drama, no more FOMO, no more penis envy. You completely scroll past the permabull fanboys, the bearmongers, the noise, all of it, on Twitter, Facebook, or whatever financial media you’re on. You’ll find that you’ll start unfollowing people because what you’ve subscribed to or what they tweet about has no relevance to your system and is only there to create noise. At that point, you’ve reached the level of a professional trader.

So if you’re a struggling trader looking to be become a pro, we hope that this short segment helps you out.

Questions or concerns? Leave a comment, and our team will get back to you as soon as we can. Cheers!