The Seven Steps to Profitable Trading, Part 1

This blog is designed to help new traders and those who have yet to become profitable understand what it takes to become consistently profitable. It’s a good idea to read the Introduction to Preston’s Mentoring Blog and to watch the 01/29/20 video “Consistently Profitable Trading: It Does Exist” prior to reading this entry.

Becoming a consistently profitable trader is NOT easy, but it IS worth it. And it DOES exist.

When you see that Etrade commercial that tells you, “Don’t Get Mad, Get Etrade” you might think that all you need to do is open a brokerage account and buy some stocks. I can tell you from personal experience that this is not true.

It’s a process, and there’s a learning curve. And understanding that is the first step to profitable trading.

1. PLAN FOR A LEARNING CURVE OF 12 TO 24 MONTHS

It’s important to also understand that it could be more or could be less. People have different learning processes and therefore different learning curves. Remember that it’s not a race. The important thing is to learn how to be profitable.

The reason there is typically such a long learning curve is that there is so much to learn and understand. There are so many different vehicles to trade, so many different types of markets, so many different trading strategies. And everyone is selling something to you and making it sound like it’s all you’ll need to make money.

So you bounce from shiny object to shiny object looking for the one that will make you easy money and instant riches. Making money off of you in this way is actually a business model that some traders choose, and many of them do well at it.

It’s not that this stage of the process doesn’t have its value; this is a very important learning stage. If you can get through this stage, learn as much as you can, not lose all your money and not quit, you are WAY ahead. And you’re one step closer.

But you have to accept this stage. It’s essential for your development, and you can’t escape it anyway. There will be a learning curve.

2. CAREFULLY AND QUICKLY EXPERIMENT WITH AS MANY STRATEGIES AS POSSIBLE

This is where the learning curve stage can be so valuable. Painful but valuable. But in order to find those strategies that will match your personality and become your chosen systems for making money in the markets, you have to be exposed to many different strategies.

And you have to study them, model them, test them, study them some more, model them again, test them again, etc. It’s a lot of work but worth it in the end.

You have to experiment with these strategies carefully, which means you have to study their fundamental concepts and understand what makes them work and what makes them different from other strategies. You have to study their risk profiles so that you understand how much could be lost from trading them. And if you trade them live, you have to start at the smallest amount of capital possible. 

You have to experiment with these strategies quickly so that you can be exposed to enough of them. 

But not too quickly, of course. You do need to give adequate time to each in order to determine its value to you, like test driving a car. But the more strategies, the better the chance you’ll find something that fits your personality and that you can build on. 

And it’s a good idea to start paying close attention to the market environment during this phase. I know, I know, it feels like just another ball to add to the balls you’re already juggling. But it’s important to understand that markets change and the success or failure of strategies are directly related to this. 

So when you’re studying and testing strategies, and you’re journaling about what you like and what you don’t like and how this works or that works, it’s important to really start paying attention to the environment. This will help you understand why something doesn’t work anymore or why it has now started working again.

And then you can really start making sense of what you’re doing. And the next strategy you test won’t seem so mystifying. But it takes a while, and it takes a lot of work.

Were there times I thought I’d never find a strategy that would work? Yes. But the more strategies I studied and more work I put in, the closer I got. And then before I knew it I found one. And it made all the difference.

3. IDENTIFY THE STRATEGIES WHICH SHOW SUCCESS AND MATCH YOUR PERSONALITY

This is where it starts to get really fun. I’m not saying the hard work is over or that you won’t experience more adversity, but this is where you’re really starting to make progress.

If there is a strategy or strategies that you feel drawn to, that peak your interest, that “speak” to you, you should stand up and pay attention. It’s not a guarantee that they will end up being the ones you stick with but one thing sometimes leads to another and this can really lead to something.

For instance, if you start to spend more time on technical analysis and certain types of swing trading strategies, keep working on this. It still might take a while to find something that works and that you can stick with, but it’s definitely a step in the right direction.

Stick with it long enough and results will come.

Initially I struggled with strategies that lost more often than they won, which is a typical feature of directional trading. But when I learned automated trading and started trading VXX in a black box, which was a directional trade, I was able to stomach the drawdowns because they weren’t compounded by the sheer exhaustion of getting in and out of the trades manually. So I stuck with this and got better.

And this helped me continue to work on market-neutral options strategies, which typically win more often than they lose. They were good countertrades to the black box; they complemented the directional strategy very well. So I stuck with this and got better.

Meanwhile, I continued to work on swing trading, hoping that some day I’d be able to put together a plan that didn’t make my stomach turn. 

At some point the charts started to make sense. And then they started telling me, I mean they literally would scream at me, THIS STOCK IS GOING TO GO UP. And most of the time it would. And this was so strong that it finally forced me to figure out how to take advantage of it in a way that matched my personality. So I’m sticking with this and getting better.

It may seem somewhat counterintuitive when you’re doing it, and it’s hard because you’re being pulled in all different directions, but once you stick with something and really study and work hard to understand it, you’ll actually start to understand other strategies and concepts as well that may have frustrated you or previously eluded your comprehension.

It just gets you focused on learning and eases the desperation of feeling like you have to find something that works.

Concentrating your mind on the trading process instead of the push and pull can lead to the next level of understanding, and then you’re really making progress.

In my next blog I’ll finish the list, starting with the concept of scaling up strategies that work for you. Stay tuned…

Preston

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