7 Principles of Profitable Trading
In part #1 last week we discussed the 5 Trading Truths to Profits, detailing how you can start thinking with an edge over the market and why this is so important for success.
Read this Part #1 Lesson: How to Use Mark Douglas 5 x Trading Truths to Profits
Today we look at the seven key principles to trading consistency. Some need a little more explaining, whilst others are easy to understand, but not so easy to implement in real trading conditions regularly.
#1: I Objectively Identify my Edges
The key for traders with this rule is their trading plans.
A price action trader’s edge in the market is the price action setups they spot to enter the markets with.
These for example; may be a Pin Bar or Engulfing Bar etc, like we discussed in this weeks charts in focus post with the EURUSD Pin Bar.
Whatever this edge is for you; it needs to be definable and you need to be able to objectively identify it. In other words; whatever the edge is that is being used to make and manage trades, needs to have a rule set that makes it the same edge every trade.
For example; an engulfing bar needs to fully engulf the previous candle. It must have a high that is higher than the previous candles high, and a low that is lower than the previous candles low. This rule set for what makes an engulfing bar is the same for any market and make this edge objective.
This cannot be tweaked or changed. It is a rule you define your trade setups with… one of many you start to create.
The key is having a plan that allows a trader to go into a market and then go to their charts without second guessing either pulling the trigger or passing on setups.
For the trader to do this they need a trading plan and rule set that clearly outlines what their trade setups looks like.
Read about creating an edge of the market more in-depth below;
#2: I Predefine the Risk of Every Trade
This is a pretty obvious rule for any trader who is serious about their trading. Before entering a trade, all traders should be working out exactly how much they are prepared to lose – NOT just looking at the upside.
This should all be worked out before setting any orders to enter.
Once again; you need set rules and a trading plan that outlines; how much you risk each trade and the money management you use.
#3: I Completely Accept the Risk or I am Willing to Let go of the Trade
This is something newer traders in particular struggle with because they never want to miss out on a trade. The more traders gain experience and the more trades they put trades under their belt, the more they get use to not only playing trades, but also passing on them.
When newer traders are struggling to accept the risks, instead of passing the trade, they will take the trade anyway. This is a massive no, no.
When traders take a trade and they have not accepted the risk, they will be entered into a trade when they are filled with doubts. When traders are in these types of trades they will find it really hard to manage the trade. The doubt will keep nagging at them and fear and greed can get inside their head.
This can lead to mistakes such as over management or the trader not closing the trade when they should or not placing a stop when they should.
The risk of each and every trade needs to be accepted and if it can’t be, then it is far easier to just pass the trade and wait for the next opportunity.
As the saying goes “It is better to be out of the market and wishing you were in, then in the market and wishing you were out”.
#4: I Act on my Edges Without Reservation or Hesitation
Every time a trader sees their edge form in the market it is critical they pull the trigger without hesitation.
Traders can never know which trades will be their winners or which will be their losers, all they can do is know that they have a profitable trading edge over a large amount of trades. We discussed this more in-depth in part #1.
Traders will have losses and they will have wins. They will have losing streaks and they will have winning streaks. If traders start failing to pull the trigger when their edge has formed in the market, they begin weakening their edge.
Traders should be thinking about their trading not so much about the individual trades, but more about the overall outcome, and making sure that outcome is profits.
Whilst the individual trades are very important, traders put far too much importance on each trade and chop and change on the back of each individual trades result.
The goal for traders is to think like a casino. A casino understands that they will lose and have losing streaks, but they also know that the odds are in their favor and after all is said and done over many games they will always come out on top because they have the edge. This is exactly how traders must approach their trading.
Whilst the individual trades are important, traders are going to lose trades. However; as long as every time their edge is present they pull the trigger and they have a profitable trading edge, after enough trades have been taken they will come out profitable.
#5: I Pay Myself as the Market Makes Money Available to me
To be a consistently profitable trader it is important to take profit as the market makes profits available. After placing A+ trades, the market will give traders the chance to take profit and protect themselves and their money.
Consistent profits can then be made by taking profit as the market makes it available.
Whilst any trader can make a winning trade, or strike it lucky with a run of winning trades; only the consistently profitable trader can manage those trades every single time for consistent profits.
#6: I Continually Monitor My Susceptibility for Making Errors
All professional traders continually monitor themselves and track their own progress.
The market is a beast and keeping a journal is the best way to stay on top of any mistakes or flaws that could be creeping into a traders trading system.
Without a journal a trader would only be guessing at possible mistakes or flaws that could be creeping into their trading.
The best way for a trader to keep well on top of their trading and to ensure mistakes and errors are not creeping in, is to have a trading journal. This journal should be regularly checked and used WITH the trading plan.
It is very important the market is closed when the trader checks their journal because a trader can be tempted to make changes or tinker with their trading when the market is open – especially after a loss.
When the market is closed, the trader has a lot clearer mind and is a lot more subjective.
#7: I Understand the Absolute Necessity of These Principles of Consistent Success and, Therefore, I Never Violate Them
The seven principles of consistently profitable trading and all the other trading rules we discuss are designed to teach traders how to get on the right track, but they are all for nothing if they are violated and not followed.
The best traders are the most consistent in their approach. The reason they are the best is that they make the same decisions day in and day out.
Their account equity tends to have a steady climb to it, rather than wild swings up and down and all over the place like other traders. They are making the same trades over and over again. When they are in the same trades, they are then managing them the same way.
I really hope you have enjoyed this two part installment.
Leave any comments or questions below in the comments.
Safe trading and all the success,