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10 Paths to Profitable Trading

“There’s a million ways to make money in the markets, unfortunately they’re all very difficult to find.” – Jack Schwager

Profitability in the financial markets is based on math not predictions and opinions. Here are the ten mathematical paths to profitability:

  1. Have a high winning percent where your winning trades and losing trades are similar in size. Your profitability comes from the quantity of winning trades.
  2. Create a reward/risk ratio of 3:1 in your trades where your winning trades are maximized and your losing trades are minimized.
  3. Trend following where you are bullish in up trends and bearish in downtrends creating profitability by being on the right side of a market trend.
  4. Trading a systematic process that is back tested to be profitable based on sound principles.
  5. Buying and holding growth stocks that are the winners of their sector and industry.
  6. Investing in sound companies with great fundamentals that you can by with a huge margin of safety and hold them long term.
  7. Buy extreme fear during market crashes or sell euphoria short near the price top in bubbles.
  8. Sell low probability option contracts with a hedge in place.
  9. Buy small far out of the money options over and over until you make one big outsized win.
  10. Trade with a positive expectancy: What is positive expectancy? Here’s a .xlsx friendly formula: Expectancy = ((PW*AW) – (PL*AL))*F Where PW = % Win; AW = Average Win; PL = %Losses; AL = Average Loss; F = Frequency

Note: You have to trade a process that fits your beliefs about the markets. Position sizing also must be structured so you avoid the risk of ruin.Without discipline and self control no trading system will be a profitable one.