Most studies show that 90% of traders and investors don’t make money over the long-term. The majority of traders, even if they get lucky and profitable early just give back those gains over time. Even buy and hold investors can become shaken out of their long-term plans to not sell when a vicious bear market takes back years of gains. 80% of traders also tend to just quit altogether during their first two years of learning lessons the hard way. Most traders don’t really fail they just quit too early and never even to the work required to even try to be successful.

Just like in sports there are many professional traders that built wealth in the markets through their skill set. Billionaire and millionaire traders are well documented, audited and revealed in many books. To say it’s impossible to make money trading is ignorant, much like saying there is no way to make money playing professional sports. However, the divide between amateurs and professionals is very wide and takes years of hard work to bridge the gap and achieve success. To be a profitable trader you must take money from unprofitable traders, you must win the game.

Here are six of the key lessons I have learned the hard way in the stock market over the past 30 years through the experience of trial and error. Big wins along with big losses have been my best teachers.

1. Trends can go a lot farther than anyone expects.

Overbought and oversold readings like the Relative Strength Index and Bollinger Bands are great for range bound markets but once a strong move is underway and breaks through the extreme readings of these indicators a trend can keep going.

While these massive trends only happen about 15% of the time in the markets and on charts getting on the wrong side of one of these without a stop loss is what creates huge losses. Being on the right side of one of these moves and letting the trade run is the primary way to create huge wins.

Key lesson: No chart has to reverse at any level, it can keep going. At least wait for a reversal first if you want to be a contrarian on a move.

2. You can trade with only a few technical indicators.

You only need a few indicators on your chart to make money. Many traders make money using price action alone for their trading signals and most successful traders don’t use more than three indicators.

The goal in trading is just to define your risk/reward ratio and signal your entry and exit. You don’t need too many indicators to do this. More indicators generally just leads to confusion. In trading less is more, focus on the trend, momentum, and turning points on a chart, that is all you need.

3. Demo trading and backtesting are not the same as trading real money.

New traders are very surprised with the emotions and ego that arise when they go from research and simulation to putting real capital at risk. Risking real money, losing real money, and making money is not the same as learning how to trade.

The importance of trading psychology is not understood until the stress and excitement begin as profit and losses start moving for and against a trader. A trader can only trade an account and position size they are comfortable with and must start small and build their tolerance and comfort zone. Trading too big will put the trader on tilt and destroy their ability to make good decisions.

Traders must be professional and focus on their trading plan not the money. They must operate like a business and not a gambler. Risk leads to stress so the risk must be managed to reduce the stress.

4. Losing money is the tuition you pay to learn lessons.

Nothing is more educational to a new trader than losing money. It is unpreventable and just part of the cost of doing business. If you lose money from not having an edge, not following your plan, or trading too big then it is crucial that you learn the lesson the first time and not make the same mistake again.

Your ability to learn, not repeat mistakes, and follow a trading system with an edge determines your long term success, not trying to be perfect. Perfection is impossible, learning is a requirement. The longer it takes to learn a lesson the more expensive it will be.

5. Trade a system that fits your personality and beliefs about the market.

Your trading system must have an edge to create profitability but it must also fit your own personality and belief system. Your system must align with your risk tolerance, available screen time, and return goals. If you are trying to be a day trader on your phone at your job you are doomed to failure. If you love active trading but try to be a buy and hold investor you likely will fail with the hands off approach.

You must love your strategy and its execution to be able to follow it. It must fit your own appetite for activity, risk, and returns to work out over the long-term. You must understand the edge through historical chart studies, backtesting, and experience to stick to it through losing streaks and drawdowns. You must have faith in your system and faith in your ability to execute it with discipline. Trading is not for the double-minded.

6. Risk management is the #1 priority, making money is #2.

New traders are too eager to make money with little if any regard to risk management. A trader should start with proper position sizing, stop loss placement, and win-rate expectations. The management of losing streaks and drawdowns will determine profitability more than winning streaks or making great calls. Few understand this and this is why so few are profitable in trading.

The core of profitable trading is risk management, without it nothing else manners as long-term the first losing streak destroys all previous profits. Not managing for the risk or ruin ensures eventual ruin for any trader who doesn’t respect the risks in the markets.

I believe these six trading rules should be a part of every trader’s system. They are expensive lessons to learn the hard way.

If you’re interested in learning more from my experiences and becoming a profitable trader yourself you can check out my best selling trading books on Amazon here.

I have also created trading eCourses on my NewTraderUniversity.com website here. My educational resources can save you both time and money in your trading journey. 

How To Win The Game Of Trading: 6 Lessons Learned During 30 Years Of Trial And Error

Image Created by Holly Burns