If you are randomly trading based on a hunch, with no real underlying system, then your odds of success in the longterm are slim. The systematic trading of a winning methodology is what creates an edge in trading.
Consistently trading a robust system or methodology enables you to trade in a way that wins in the end, controls risk, and does not bring your ego and your emotions into your trades. Relying on your own personal opinions and hunches to be profitable is not a trading system. Thinking you are smarter than the majority of traders will lead to eventual account destruction.
Ten questions to ask yourself before every trade:
- Does this trade fit my chosen trading style? Whether it is: swing trading, momentum, break out, trend following, reversion to the mean, or day trading? Does this trade fit into the parameters of who I am as a trader, or is it just based on my own fear or greed?
- How big of a position do I want to trade? How much capital am I going to risk? Am I limiting my risk to 1% or 2% of my trading capital? How big should my position size be to limit my risk?
- What are the odds of my risk of ruin based on my capital at risk?
- Why am I entering the trade at this moment? What is the entry trigger to take the trade? Is this a quantified entry on my trading plan?
- How will I exit with a profit? A price target or trailing stop?
- At what price will I know that I was wrong? Where is my stop loss based on the position size?
- Will I be able to admit I was wrong and exit the trade if my stop is hit, or will my ego make me hold and hope? Can I trade this position size and keep my ego out of the trade?
- Is the risk small enough that I can emotionally handle the loss without blaming the market or myself? Is my risk small enough to stay in control?
- Can I afford to risk this money or do I need it for upcoming bills? Am I trading with risk capital and not living expenses?
- Am I committed to staying disciplined and following my trading plan on the trade?