If you want to become a profitable trader, you must find a trading strategy with high returns. So you can learn everything about trading including chart patterns , price action , Fibonacci extensions , RSI , MACD , etc. Because the more you learn, the better you will become. However, this backfires. Because the more you learn, the more you will doubt yourself because of conflicting information.
Now a question. How to get into the top 5% of traders when almost everyone fails? Obviously, in order to do this, you must do something that 95% of traders do not.
What do you need if you want to become a successful trader?
- This is not technical analysis .
- This is not price action trading.
- This is not trading psychology .
Your trading strategy must have a statistical advantage in the markets. What does it mean? Here is an example:
Let's say I made a bet with you on a coin toss. Every time it comes up heads, you win $2. Every time it comes up tails, I lose $1. Who will win in the long run? You, of course! Why? Because you have a statistical advantage. The same is true for trading!
You must have a statistical advantage in the market because without it, nothing else matters. How can you gain an edge in the markets?
The easiest way is to use the experience of other traders so that you don't have to reinvent the wheel every time. Read articles and books on trading, look for trading systems with backtesting results. Based on my experience, these trading systems have a good chance of working in real markets. Then take the concepts of these trading systems and test them for yourself to see if they work or not.
Don't let yourself be fooled
Here is the process most traders go through:
- Learn a new trading strategy.
- When a trading strategy stops working, something new will switch.
- When something "new" stops working, it will switch back to something else.
What is wrong with it? If you abandon your trading strategy after a few losses, it's like saying a coin is fake when 5 heads come up in a row. Isn't that stupid?
In the short term, a coin can land heads (or tails) multiple times in a row. But if you flip a coin 1000 times, then you will probably get closer to a ratio of 50% heads and 50% tails.
In the short term, your trading results are random. But in the long run, they should match the statistical expectations of your trading system. So don't give up on your trading strategy after a few losses. Instead, give your trading strategy time to work out its edge (make at least 100 trades or more) before deciding whether it works or not.
How to improve your trading results?
You may have tried things like chart patterns, trading indicators , price action patterns , etc. but still not succeeded in trading. Why? Because in trading, less is more. This means that if you are not getting the results you want, take a step back and get rid of the clutter.
Develop a trading plan
A trading plan is a set of rules that you follow when trading so that you can trade objectively and get consistent results.
To design one, you must answer the following 7 questions:
- What is your trading timeframe?
- What markets do you trade?
- How much risk do you take on each trade?
- What are the terms of your trade setup?
- How will you enter your trade?
- Where is your stop loss?
- Where is your profit target?
Make trades according to your trading plan
Once you have developed your trading plan, execute your trades according to the rules of your trading plan and nothing else. Also, you should not change your trading plan after a few losing trades, even though you may be tempted to do so.
Remember that in the short term your trading results are random. And eventually they will get closer to their real numbers. This means that you need to make at least 100 trades before you come to the conclusion that your trading plan is working or not.
Record your trades
You must record your trades. After all, how can you get better if you don't know what you're doing?
So here are the metrics you can record:
- Setup - The type of your trade setup.
- Market - The market you traded on.
- Entry Price - The price you entered.
- Stop Loss - Your stop loss level.
- Exit price — exit price.
- P&L is your profit/loss on a trade.
In addition, you must take a screenshot of the screen with graphs.
This means that when you enter a trade, take a screenshot of the chart showing your entry point and stop loss. Once the trade is complete, take another screenshot and note your exit level.
Examine your trades
If you've completed steps 1 through 3, here's where the magic happens!
Look in your trading journal and determine the most profitable trade setup - and use it most of the time. Determine a trading setup that is worth your money.
Customize your trading plan according to your findings. Repeat steps 2 to 4 again. It is this sequence of actions that separates professional traders from unprofitable ones.
Other people's opinions are useless
I am sure that you will agree with me when I say that there is a lot of redundant information in trading. Just join any Telegram channel or forum thread and you will have tons of traders sharing their opinions, analysis, trading ideas, etc.
However, if you blindly follow the opinions of other traders, you will not understand what their trading plan is. You won't know when they'll get out of a loss, when they'll take profits, if their trading strategy has a statistical advantage in the markets, etc.
Therefore, follow only your plan and stick to the steps that I have described above. It's a proven strategy that works, and doesn't require you to listen to other people's opinions, analysis, or any other informational noise.
All you have to do is follow it with the utmost discipline and let your trading results speak for themselves.
Always study the markets
I started trading price action in my early years of trading. I delved into topics such as Japanese candlesticks , support and resistance levels , chart formations, etc.
After I had a solid understanding of price action trading, I thought to myself, “How do hedge funds and institutions trade the markets?” This brought me into the world of trend following—that’s how billion dollar hedge funds make money in bull and bear markets.
At this point, I realized that trend following is just one type of systematic trading strategy. As I dug deeper, I discovered more trading systems that could make a profit in different market conditions, which prompted me to create my own trading systems. I continue to study every day.
As a professional trader, you will always study the markets. Because there are always new trading strategies to learn, emotional challenges to overcome and market changes to adapt to. The day you stop learning is the day you fail - don't let that happen to you.
Have realistic expectations
Most traders have no real expectations from trading. They assume that they can take a course, master a few chart patterns, and then start earning money from the markets.
But the truth is different: trading requires special professional skills, and it needs to be systematically learned.
You don't graduate from medical school in a few weeks or become an engineer by learning a few mathematical formulas. It's a steep learning curve and you need time to master the necessary knowledge (at least a few years or even more).
It's the same with trading. You won't become a trader just by memorizing a few patterns or learning a few trading setups. So, give yourself time to learn how to trade. Don't look for shortcuts. Don't try to get rich quick. And don't think you'll be able to quit your job anytime soon.
Trading should not be the only source of income
After many years of studying successful traders, I have come to understand the following: Most of them have multiple sources of income. Why?
Because if trading is your only source of income, you will need to make money every month. This forces you to make bad trading decisions such as widening your stop loss, averaging out on losing trades, trading too large lots, etc.
This is why many professional traders do not rely on trading as their sole source of income. I will give a few examples.
- Ed Seikota , market wizard, sells a subscription to a closed group that costs $99 a month.
- Mark Minervini, master of the stock market, offers a program for experienced traders that costs $5,000.
- Most hedge funds (even the best ones) charge management fees every year, even if it's a losing year.
If you manage a billion dollar hedge fund and charge a 1% management fee, that means you are guaranteed $10 million a year.
As you can see, professional traders and hedge funds structure their trading in such a way that it is not their only source of income.
If you have multiple sources of income, you can use the "extra" money to increase the size of your trading account. Because with a larger account size, you can earn more money.
Let's say your average return is around 20% per year. It means:
- If you have $1,000 in your account, you will earn about $200 per year.
- With a $100,000 account, you will earn about $20,000 a year.
- With a $1 million account, you will be making about $200,000 a year.
Summing up
If you want to be in the top 5% of traders, you must act differently than the 95% of traders. Here is what you should do:
- Trade a strategy that gives you a statistical advantage in the markets.
- Understand the law of large numbers and that your trading results are random in the short term.
- Be consistent and systematically improve your trading results.
- Don't follow the news, other people's opinions or analyzes - this is a noise that is best ignored.
- You should always study the markets, never stop learning.
- Have realistic expectations: you won't get rich after trading courses.
- Have multiple sources of income.