According to many studies by brokers I have seen 90% of traders lose money over the long-term, some brokers say it is higher or lower but the range is typically in that area. There is a popular saying in the trading world that “90% of traders lose 90% of their money in the first 90 days of trading.” This is known as the 90/90/90 rule. Let’s look at some simple ways to avoid this disaster while still in the learning curve.

1. Do research in chart studies and backtesting before trading.

New traders must first have the context in which to place trades. Studying historical charts, looking at the patterns the best performing stocks in history made during their runs, and also backtesting signals can show what works and what doesn’t. Past patterns don’t predict future success but they improve the odds greatly.

What a trader will see in research is the repeating patterns caused by the psychology of the market participants. The purpose of the study is to create a strategy to profit from these cycles of trends and swings using price action signals or technical indicators.

2. Keep losses small to stay in the game.

A popular saying on Wall Street, especially with new traders is “You can’t go broke taking a profit,” this is not true. if your wins are small and your losses are big you will eventually lose all your money trading. The single biggest cause of unprofitable trading is big losses. Letting winners run and cutting losses short is an edge in itself in creating asymmetric risk in your favor even if the entries are random, the trade management is a big part of profitable trading.

After position sizing, stop losses are a trader’s most important risk management tool. Cutting your losses is both a science and an art. You want to use implied and historical volatility to calculate the math of your risk with any position. You also must create the best principles for setting your stop losses on any single trade or inside your system.

All your trades should end in one of four ways:

1. A small win
2. A big win
3. A small loss
4. Break even

You should never experience a big loss. If you can get rid of big losses, you have a great chance of being profitable for years to come.

3. Develop a trading strategy where the wins are bigger than the losses on average.

There is a common saying on Wall Street “Let winners run and cut losers short.” This quote tries to express the principle of creating big wins or small losses. Creating a high risk/reward ratio through the use of trailing stops for profitable trades and stop losses for unprofitable trades is the foundation of profitable trading. The primary reason the majority of the best traders are profitable is due to big winning trades and small losing trades not their win rate.

Letting winners run and cutting losses short is an edge in itself in creating asymmetric risk in your favor even if the entries are random, the trade management after entry is a big part of profitable trading.

The profit factor for a trader or trading system is determined by taking the gross profit of winning trades and dividing it by the gross losses from the trades that lost money for a chosen sample size. This formula considers the cost of slippage, fees, and any commissions paid. The profit factor can be defined for any period of time trading like monthly, quarterly, yearly or lifetime.

The profit factor answers the question how much can I make or did I make for every dollar risked? A profit factor can be determined for both backtests and actual trading performance.

This is a metric of trading performance that shows the specific amount of money made per dollar of risk taken. If a profit factor has a value that is more than one it shows that a discretionary trader of mechanical trading system is profitable over the period of time being measured.

Below is an example of trading performance showing a backtested trading system had a historic profit factor of 2.00 when dividing all the winning trades profits by all the losing trades losses form the signaling data of entries and exits.

The profit factor is calculated by dividing the total gross profits by the total gross losses for a sequence of trades:

If you structure a 1:3 risk/reward, after ten trades your account could look like this as an example:

  • Lose $100
  • Make $300
  • Lose $100
  • Make $300
  • Lose $100
  • Make $300
  • Lose $100
  • Make $300
  • Lose $100
  • Make $300

Profit $1,000 with only a 50% win rate! (Of course trading is never this simple but the example is for the sake of clarity of the example).

However if you allow losers to run, hoping they will come back so you can take profits on a rebound, then you can get into trouble fast.

What if the stock you were trading fell from $30 to $29, you didn’t stop out, and it kept falling to $20? What if you started wanting to lock in profits at $31 and not let your winner run? The dynamics of your risk/reward ratio would change, leaving you unprofitable even though you had an 80% win rate.

  • Lose $1000
  • Make $100
  • Lose $500
  • Make $200
  • Make $100
  • Make $100
  • Make $200
  • Make $100
  • Make $100
  • Make $100

Lost $500 even with an 80% win rate!

Remember that you can cut losses even shorter if you are proven wrong before your stop is hit, but at the same time you have to allow enough room for normal fluctuations and volatility in your stop and use position sizing that you are comfortable with for your trading account size.

  • Allow winners to run as far as possible with the use of trailing stops. You never know when you could have a huge win with the right entry and trend.
  • Know how much you will risk on any one trade then do not enter a trade where the upside is not at least three times your risk of loss if your stop is hit.

4. Quantify your trading system.

Objective: (Of a person or their judgment) not influenced by personal feelings or opinions in considering and representing facts. Having actual existence or reality.

Objective traders have a quantified method, a system, rules, and principles they trade by. They know where they will get in a trade based on signals, and where they will get out based on price action. Objective traders have a written trading plan to guide them. The guides of the objective trader are historical price action, charts, probabilities, risk management, and their edge. They react to what is happening in quantifiable terms that can be measured. They go with the flow of price action, not the flow of internal emotions.

What exactly is your entry signal going to be? What technical indicators will trigger you to enter a trade?

What will the perceived edge for your entries be based on? Will you quantify your entries edge with back testing of through trading principles?

Will you wait for an initial move in the direction of your trade entry or will you enter based on a technical indicator trigger?

How will you trade in different market environments and trends? Will you have better odds of success buying dips in bull markets and shorting strength in down trends?

What is the risk/reward ratio for the trade you want to take? How much are you willing to risk if the trade is a loser? How much could you make if you are right? Is it worth it?

What are the probabilities that this entry will be a winning trade based on past historical price data and charts? With the winning percentage in mind how big do the winners have to be and how small do you have to keep the losers for the trading system to be profitable?

  • Where should your stop loss be? At what price level will your entry be wrong and signal you to exit the trade with a loss?
  • How big of a position size should you take based on your stop level and total capital you are willing to risk on this one trade?
  • Is your position size small enough to enable you to hold the trade without emotions effecting your ability to follow your trading plan?
  • When you open this trade in addition to your other positions, how much of your total trading capital is now exposed to loss if all trades went against you at the same time?

Don’t succumb to the emotions of a trade, and don’t attach your ego to it. Be the trader that witnesses the trade from an emotional distance with curiosity. If you can find that space between yourself and the trade, you will become more accurate and more profitable. When you can approach the results of your trades with equanimity, then you are at the next level.

5. Stay disciplined with system execution long-term.

Trading discipline involves making yourself follow your own trading rules. Self discipline enables a trader to trade a system consistently over time like they planned to with the right position sizing, stop losses, and trailing stops.

Many times a trader can feel like they are two different people. They can feel calm and rational when the market is closed and they are researching trading, developing a system, and planning on the strategy they will use to enter and exit trades and how big their position sizing will be. Then when the market is open, prices are moving, and they are making or losing money then emotions and ego can rise up and make it more difficult to think clearly and follow their predetermined plan. Being a professional trader is the ability to do the right thing regardless of how you feel.

Here are five times a trader will be tempted to lose their discipline and follow their emotions, desires, or ego over their trading plan and what to do about it.

The lack of discipline to take a trade when you have a signal can be devastating as you miss the good trades. Fear can be holding you back from taking your entries. The causes can be that you don’t have faith in your signals because you have not backtested them enough, don’t understand the edge, or you are simply trading too big. In trading you will have losses and you have to accept it if you want to trade. If you felt too much stress when taking a trade decrease your position size until you are comfortable enough to enter.

“I take the point of view that missing an important trade is a much more serious error than making a bad trade.” – William Eckhardt

Fear of missing out can cause a trader to lose discipline and enter a trade too late leaving them with a bad risk/reward ratio. Knowing that no one trade will matter much in your next 100 trades will help lower the desire to chase. There will be other trades, wait for them.

Entering too early into a trade can be a loss of the discipline of patience. Front running a signal to try to get a better price is dangerous because you are buying randomly and with no edge. A signal is a safety filter to ensure you have a better chance of making money on a trade. If you don’t have the discipline to wait for your signal then you have no edge over other traders.

“As a result of having no system and no rules, they have no way of effectively managing their trading. How well do you think a company would operate with no plans, no business systems, and no rules? Because they have no rules to follow, everything no-rules discretionary traders do is a mistake.” – Van Tharp

Letting your own beliefs about what the market should be doing or your bias about what the market will do in the future can interfere with your discipline to follow your own trading system. A trader has to have the mental flexibility to understand anything can happen and also the discipline to follow their trading system so they will be able to capture the moves when they happen.

The discipline to follow your trading system is an edge. If your trading system has a quantified profit factor over a series of trades or you are a discretionary trader with rules that create good risk/reward ratios then your job is to simply be a disciplined trader and let your edge play out over time. You are your edge.

In trading, discipline is an edge. Having the ability to implement your trading plan in real time consistently will make you a better trader and create better trades. No trading system will be profitable no matter how good it is if it can’t be implemented with discipline over the long term.

Discipline is the art of execution. Discipline can emerge from having faith in yourself and your trading system so your trading plan can be used as a compass and a map to profitability not just a suggestion.

Trading is a high performance sport much like other professions where approximately the top 10% make money doing it and the top 1% become very wealthy through huge outlier success. To get to the highest levels you must do things differently than the majority and do what the top performers do.

If you’re interested in learning the principles for becoming a profitable trader 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. 

90% of traders lose money... So how to be in the top 10%
Image created by Holly Burns