Principles of Profitable Trading

A profitable stock trader’s success is not based on picking the right stock at the right time. There are dynamics that determine success other than entries and picks. Millionaires aren’t  created because they have a magic system for trading through all market environments. There are a couple of things that influence profitable trading, and they could surprise you.

#1. Having the right mindset to win; psychology.

#2. Managing your risk exposure on each trade; risk management.

No system will work if you can’t trade it consistently. You must stick to your method when you are losing. Whether it’s to keep taking entries, to go to the sidelines and wait for volatility, or to settle down and wait for a trend to emerge.

You must stay in the game and be ready to take your entry signals. The primary reason that traders lose money is that they give up when things get tough because they don’t have faith in their system. Trader must persevere,  never quit learning, never quit working, and always be ready to trade.

No single trade should weigh too heavily on your mind. No one trade should be so large that it determines your long-term success. You should trade a size that has meaning to you, but no one trade should risk more than 1% of your account capital. If your account is $25,000, then you should be risking $250 to make $750 to create a 1:3 risk/reward ratio. Risking $500 to make $250 is not a good long term trading strategy, the first 5 losses in a row will lead to both financial and emotional pain. It’s crucial to manage your risk through the right position size. If you’re going all in on every trade, then you may have some amazing returns for awhile, but the odds are that the markets will take back those outsized returns when the dynamics change. Risk a little to make a lot, don’t risk a lot to make a little more.

Your price action trading system is only the first step. Your dedication to understanding your psychology, and mastering risk management, will determine your profitability.