The Seven Steps to Profitable Trading, Part 2

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.

This blog is designed to help new traders and those who have yet to become profitable understand what it takes to become consistently profitable. 

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

In my last blog post I talked about the acceptance of the learning curve, the importance of studying and testing many different strategies and how crucial it is to identify those strategies that work and match your personality. Now, once you’ve found those strategies…

4. SCALE UP THE THINGS THAT WORK

Scaling up can be daunting but it doesn’t have to be, as long as you do it slowly and carefully and as long as you have faith in your strategy. You have to do it if you want your returns to be meaningful, otherwise you’re really just spinning your wheels.

When traders say, “Your risk has to be the number one consideration,” they are 100% correct. In fact, this is the ONLY way you should scale up a strategy. It can’t be based on how much you can make from it. That’s simply a recipe for disaster.

Making more money from a strategy means your losses will be larger too, and this can be more psychologically difficult than you think. There’s a big difference between thinking you can handle a larger loss and actually experiencing one. Trust me on this; I’ve dealt with this more than once.

So once you’re ready to start sizing up that strategy that is working for you and which matches your personality, the first thing you have to do is look at how much it could lose in a worst-case scenario, or, if you have detailed test results, what its biggest drawdown was. This is also important because it determines how much you will need to keep in your account to trade it.

And any capital you allocate to it should be RISK CAPITAL, which means it’s there to be risked. Don’t put in the money you need for next month’s bills.

And then you scale it up slowly and carefully, like I said. A little at a time. And you have to make a decision on whether or not to scale it up systematically or wait for a drawdown. I know, I know, drawdowns feel like the worst time to scale up. But that can sometimes be the best time to do it. You don’t want to scale it up after several wins in a row and then take that inevitable loss with more capital, do you?

When you start thinking about scaling up a strategy it forces you to ask yourself how much faith you really have in it.

That faith has to come from understanding the strategy both inside and out. Know why it’s working and know when it struggles so that you can avoid the surprises that can cause bad decisions. 

If someone asks you to describe your strategy in detail you should be able to do it clearly and without hesitation. And you should be able to make even your Uncle Phil, who rarely pays attention to the markets, understand the concept on at least a very basic level (if he doesn’t lose interest after the first couple of sentences, like most people do who aren’t in the markets).

It’s important to understand that when you slowly scale up something that works, it forces you to take it more seriously. This can instill discipline into your process. And this is a big deal.

And I believe this point has to be made again: the method and amount of scaling up MUST depend on the risk you’re taking. That has to be the main consideration, period.

5. ELIMINATE THE THINGS WHICH ARE DISTRACTING AND COSTING YOU MONEY 

For a long time I wanted to trade those intraday strategies that make prop traders filthy rich. I figured I could do it if they could do it. But I’m just wired differently, and I eventually had to come to terms with that.

Intraday trading wasn’t making me filthy rich, it was costing me money. So I had to eventually eliminate it from the things I was doing and stick to the things that were working, like market-neutral options, automated volatility systems and swing trades.

The strategies that weren’t working were hurting my confidence, which was actually making me question whether I was good at the things I was actually good at. So they had to be eliminated.

And, like I said, they were costing me money. So why did it take me so long to divorce myself from intraday trading?

Because I wasn’t being honest with myself. I thought I could force myself to be good at something that didn’t match my personality. So I wasted a whole bunch of time and money, unfortunately.

But once I was willing to be honest, and to have confidence in my abilities when it came to the things that were showing success and which matched my personality, I was off and running. It’s that simple. Obviously it’s easier said than done, but it’s that simple.

Focus on what’s working and put aside the things that aren’t.

6. SET PROCESS IMPROVEMENT GOALS BEFORE YOU SET MONETARY GOALS

Every year we want to start fresh, make resolutions for ourselves and follow them, and this should go for our trading as well.

But you don’t want to shoot for a goal like, “I want to make $10,000 this year instead of the $7,000 I made last year.” That’s too result-oriented and focuses your mind on making money instead of the trading process and risk.

This year I set out to create a trading plan that would take advantage of certain price behaviors in stocks. The plan had to be something I’d be comfortable executing, it had to have solid risk controls built in to it and it had to allow me to comfortably size up when it was time. It also had to allow me to trade multiple stocks at the same time without the exhaustion of too much activity and without the requirement that I be at my desk every second of the market day.

That was my goal because I realized I had to start taking advantage of the setups I was seeing over and over again. I felt like I was throwing money away every time I saw one of the setups but couldn’t do anything about it because I didn’t have a plan for it!

Other goals from years past were being more patient with my option spread executions, not forcing trades if they weren’t actually there and pushing back at my negative inner voice when it started abusing me (I’ll talk about this in a later blog post).

None of these goals have to do with how much I wanted to make. And that’s because I’ve been trading long enough to know that if I focus on the process the results will come.

Don’t get me wrong, you can set monetary goals. But they should always be secondary to your process goals so that your focus is on the quality of the trades themselves and on your risk.

7. REMAIN HUMBLE AND CONTINUE TO WORK LIKE IT’S YOUR FIRST YEAR, EVERY YEAR

Once you get cocky and think you can just rush into a trade without vetting it properly, your goose is cooked.

The market always knows when you’re being careless and lazy. And it will punish you for it.

And if it doesn’t punish you the first time, or even the second time, it will do it at some point, guaranteed. It’s inevitable. And it’s because you can’t make consistent money in the markets without preparation, discipline and focus. The market demands it. 

Remember, you’re trying to make money in a cutthroat environment full of participants who’ve spent their careers getting highly adept at picking the pockets of those less prepared. You’re up against ringers with enormous resources and information, and they’re counting on your carelessness.

Make sure you have a clear plan for every trade you make (preparation), and make sure you’re willing to execute it (discipline). Otherwise, don’t trade it. And if something is working for you, don’t get distracted (focus). Work hard to get better at it.

And don’t forget to make sure you’re learning from your mistakes, not dwelling on them and making yourself feel bad for making them. This is an essential way to get better at what you do.

When you’re prepared, disciplined and focused, you’re a humble trader. You’re willing to learn and to get better. And you’re on your way.

Know who YOU are in the markets and what YOU do and then keep getting better at it.

Preston

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