The Anatomy of a Good Trade

“There are just four kinds of bets. There are good bets, bad bets, bets that you win, and bets
that you lose. Winning a bad bet can be the most dangerous outcome of all, because a
success of that kind can encourage you to take more bad bets in the future, when the odds
will be running against you. You can also lose a good bet, no matter how sound the underlying
proposition, but if you keep placing good bets, over time, the law of averages will be working
for you.” – Larry Hite

Here are the elements of good trades:

  1. Your position size should be small enough to keep the volume down on your emotions.
  2. Your entry has to be based on a quantified signal.
  3. A good trade has a good risk/reward ratio. Your stop loss should be positioned so that if you are wrong then you lose a small amount of money. You have to leave your profit side open to capture trends when they occur.
  4. The odds of winning trades are greater when you go with the larger market trend. Buying dips in uptrends and selling rallies in downtrends have the best odds of success.
  5. Trades have to be taken inside a quantified system to have meaning above the randomness of any one trade.
  6. Good trades are taken inside your own trading timeframe.
  7. Good trades end in one of three ways: big wins, small wins, or small losses. A good trade never ends in a big loss.