The right habits and skills are essential to have good, consistent results speculating in the markets. The two main reasons for not having the success most traders aim for, you have probably already have heard countless times. The key to success is letting profits run as far as possible on winning trades and cutting losses quickly on losing trades. This must become a conditioned and automatic habit, 100% of the time. Instead of cutting losses short and letting profits run, losing traders do the exact opposite. They let losses run or to make matters worse, add to losing positions, and cut profits short on winning trades!
Trading is meant to be joyful and profitable with the disciplined use of a good trading plan and timing approach. It is completely normal to take losses on some trades. This is the main cost of doing business. Risk must be predefined at a small percentage of capital per trade. Most day traders do not risk more than 1 – 2 % per trade. Even with a mediocre trading plan, it is also inevitable to have winning trades. Some of these trades will be big winners if the timing is right and you catch a significant trend change. The risk per trade and trade size is determined by the trade set up and how much is at risk based on the entry point and the correct stop loss placement. If a stop is hit, then maximum loss is no greater than 1 – 2 % of capital, for example.
On winning trades, a trailing stop should be used to let profits run and not give back too much of your profits if the trend begins to change. I recommended scaling out of winning trades and getting in the habit of rewarding yourself on some of the position when you are right, and then moving your stop loss to “break even” to protect your capital. For example, when a trades moves in your favor, taking 1/4 or 1/3 of position off at an initial target to lock in some profits and then moving the stop loss to break even to protect capital. Once a new trend is established, using a trailing stop loss that adjusts with the trend to let profits run until higher price targets are reached or a reversal of the trend begins to occur. The cardinal rule is to NEVER let a winning trade turn into a losing trade.
My definition of a winning trade, once the trade moves in your favor, is a trade that never returns to the entry point. The focus is on making good trade entries at the right time. If an opportunity is missed to buy or sell at the best time, then we wait until the next opportunity to buy the pullback or sell the rally. Trading opportunities are like buses. There is always another one coming just around the corner. Our job is to be patient and wait for the best trade set ups and opportunities to unfold, and then strike at the right time.
Good, consistent habits is the key to success in all areas of life. Trading, just like competing in sports, is also psychological. We must be confident, focused, and in the right frame of mind. There are many good books written on trading psychology. My personal favorite which includes the right habits and skills, is Mark Douglas’ “Trading in the Zone.”
Wishing you the best of success!
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