#1: Consistent actions lead to consistent results
I remembered my first trading system.
It was a Time Range Break Out mean breakout strategy.
You buy when the price crosses the upper band and sell when it crosses at the lower band.
The first few trades I did were winners, then the losses came and I figured this trading strategy doesn’t work.
So, I moved on.
Next, I chanced upon harmonic patterns.
I spent half a year learning how to draw these patterns (guess I’m a slower learner).
At the start, I had some wins but slowly, the losses kicked in and eroded all my profits.
Again, I told myself…
“This trading strategy doesn’t work. Let’s try something else.”
This brought me to the world of price action trading, support and resistance, candlestick patterns, etc.
Again, the same pattern repeated itself.
I had some winners, some losers, and I gave up the strategy.
One day, I asked myself…
“Why does this always happen?”
“Why am I not getting any consistency in my trading?”
“It’s always a few winners and then the losses pile up and take everything away.”
Do you know what I realized?
The problem was me.
I was hopping from one trading strategy to the next.
My actions were inconsistent. And because my actions were inconsistent, I got inconsistent results (duh).
So, don’t make my mistakes.
If you want consistent results from trading, you must have consistent actions.
Stick to one trading strategy, master it—and then move on.
#2: Your trading strategy must have an edge
Now, being consistent with your actions is important in trading.
But that’s not all because you must also have an in edge in the markets.
You’re probably wondering:
“What does it mean?”
Simple.
This means your trading strategy must yield a positive result in the long-run.
If it doesn’t, then no amount of consistency will save you because you’ll end up a consistent loser.
Don’t believe me?
Then go down to the nearest casino and bet consistently.
You can be consistent with your risk management, bet size, games you place, etc.
In the long-run, you’ll still lose consistently because you don’t have an edge over the casino.
Agree?
And it’s the same for trading!
You must have an edge in the markets because without it, no amount of consistency, risk management, trading psychology, etc. will save you.
Next…
#3: This is the most important formula in trading…
You’re probably wondering:
“How do I know if I’ve got an edge?”
That’s a good question.
You can’t tell if you have an edge based on chart analysis, risk management, psychology, etc.
Instead, you must be able to quantify your edge.
Here’s the formula…
E = (average gain x winning rate) – (average loss x losing rate)
Now, don’t panic because the formula is easy to understand that even a 10-year old can do it.
Your expectancy will vary from one trading strategy to the next (and from trader to trader).
It’s possible to have an edge with a low winning rate because your average gain is much higher than average loss.
Likewise, it’s also possible to have an edge with a higher average loss than gain because your winning rate is high.
#4: The holy grail doesn’t exist
Why is that?
Simple.
A trading strategy is meant to profit from a certain “pattern” in the market.
But as you know, the market is always changing. It can move from an uptrend to a downtrend, range to breakout, etc.
This means a trading strategy can only profit from a certain market condition before it goes into a drawdown when market conditions change.
(An example: trend followers make money in trending markets but go into a drawdown when the market goes into a range.)
So if you agree with what I just said, then you can understand why the holy grail doesn’t exist.
But the good news is this…
You don’t need the holy grail to be a consistently profitable trader.
All you need is a trading edge, consistency with your actions, and…
#5: Diversification works
Recall:
I said the holy grail doesn’t exist because market conditions change.
But, what if I tell you there’s a “secret” technique which allows you to profit even in different market conditions.
Do you want to learn more?
Great!
So here’s how it works…
You want to diversify across different trading strategies.
So if one trading strategy underperforms, the other profitable trading strategy can “cushion” the damage (and possibly even keep your portfolio in the green).
You’re wondering:
“But what if both trading strategies underperform at the same time?”
That’s a good question.
The key here is to trade multiple uncorrelated trading strategies.
#6: Have another source of income
Here’s the truth:
No matter how good you are as a trader, you’ll encounter losing streaks, losing weeks, and possibly even losing years.
If you do not prepare for it, you’ll face difficulties putting food on the table, paying your bills, etc.
And in such scenarios, it’s difficult to make good trading decisions because you’re trading with money you can’t afford to lose.
You’ll average into your losses hoping to make it back quickly or widen your stop loss so you don’t lose your money.
So what can you do about it?
Well, that’s where having another source of income helps.
It could be having a job, an online business, affiliate marketing, etc.—the more sources you have, the better.
