Become a Consistent and Profitable Trader — Two Rules
How I Stopped Losing Money to the Markets
The Wave of New Traders
A few days ago, I gave a talk at my old high school (digitally of course since covid). It has been 15 years since I graduated, and I was talking to a class of Business and Marketing (DECA) students about how I navigated life after high school. It was a blast! During the Q/A section, one of the students asked if I was in to trading and finance. My eyes lit up!
Whether it was caused by the crypto boom, the popularization of free trading apps like Robinhood, or social media like reddit’s Wallstreetbets (probably a combo of all 3), it seems like more and more people of all ages are putting money into the markets and beginning their trading journey. Welcome all!
Disclaimer:
Keep in mind this is trading advice, not investing advice. I do not have a career in finance and am not a professional trader. These are the things that worked for me and my risk tolerance. It might not be right for you and your trading style. Seek a professional if you need real financial advice!
How to Become Consistent
I told the students interested in trading to aim at developing consistency instead of trying to hit home runs with every trade. I know YOLOing and gambling in the Options market looks fun and can produce high returns, but luck does not last.
Making it in this “game” requires a lot of discipline, patience and practice. These two rules put me on a path of consistency and success with my trading:
Rule 1 — Cut Losses Quickly
One of the simplest ways to find consistency is to think and act like an emotionless machine. Easier said than done, but with a little discipline and practice you can train your mind to behave this way. For a long time, I used this method to control my risk:
Exit the losing trade at -1% of your account value. No matter what.
$5000 * 0.01 = $50
Playing this tight is hard, but think of it this way:
A machine doesn’t care about being right or wrong. A machine executes the program. Be a machine. Take the loss. Find a new trade.
If you stick with this method and notice you are constantly exiting your trades shortly after entering them, you need to adjust your entry points and redefine your strategy. As a trader you must protect your bankroll, stay liquid, and understand what you risk. You do not want to become an accidental investor/bag holder by holding a losing trade and thinking, “it will come back.” Remember this:
You can always re-enter the trade.
Holding a trade that goes from a 15-30%, then 50%, then 80% loss can result in a cascade of bad decisions. This has happened to me more than I’d like to admit over the seven years I’ve been trading! EA, NVDA, GS to name a few names that have left me feeling sucker punched in the past…
Avoid that feeling by having a solid stop-loss strategy and having the discipline to follow your plan. Using this method can help build intuition around good entry and exit points. There will always be losses in trading, so make sure to limit them and protect your money!
Rule 2 — Do Not Trade Every Day
When I started trading options, I wanted to trade every day. Trading was an obsession, and I was constantly plugged-in to market data and social media. I was not getting enough sleep, and would even sometimes wake up in the middle of the night to check futures if I was worried about my positions. Ultimately, it was exhausting and put me into a negative emotional state that resulted in losses. I unplugged. I stepped back. I reflected…
“Only enter a trade after the action of the market confirms your opinion and then enter promptly” — Jesse Livermore
Instead of trading every day, I made a short list of stocks I wanted to trade and watched their ranges. To this day I rarely add and remove names, and I’ve been watching many of the same names for years now. A few of my favorites: BAC, OHI, SQ, HAS, MSFT
I love trading Bank of America (BAC). For months, BAC has been in a range of 23–26 dollars. Any time it dipped to 24 dollars or less, I added to my position of stock or bought a few calls to flip when it went back to 24+. It has been pretty easy money, but it requires patience!
Since trading has become commission-free, accumulating small lots of shares and contracts has never been simpler. I no longer day-trade, so when buying options I tend to buy In-the-money with at least a few months of time and a delta of .60 to .80(depending on other factors). I wait for dips or red days, and I buy towards the end of the day. I keep an alarm 15 min before market close!
Final Thoughts
Trading is a tough way to make a buck, and many traders never make solid returns. If you have a plan and can stick to it, you’ve already got an edge over a lot of traders! My advice for becoming a consistent trader is to follow these two rules:
- Cut losses quickly.
- Do not trade every day.
Master these two rules and you’ll be profitable in no time!
Thank You!
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