Trading can be a very expensive educational process for professionals from other fields that feel like they are smart enough to beat the markets with no experience. In trading, we are competing against professionals and people that do it for a living have an edge. The only way to make money is to have an edge yourself that creates more profits than losses at the end of a time period.

Your edge from your other career will not translate to trading as it’s a different game. This game is one of following trends, being a contrarian at market extremes, along with cutting losses short and letting winners run. Intelligence, ego, and emotions can work against you in the markets as the unexpected happens regularly.

Here are the six most important lessons I have learned in 30 years of trading and investing in the stock market.

Risk/reward ratio is more important than entry signals.

Your potential maximum risk of loss versus your potential for maximum gain on any individual trade is more important than an entry signal. An entry signal can just be an indication that there is a greater probability of one thing happening than another. An entry signal without the context of position sizing, stop loss, trailing stop, and profit target is meaningless as it doesn’t define your risk/reward ratio.

Stop losses are more important than profit targets.

How much you can lose is more important than how much you can make. Big losses can cause you to be unprofitable and theoretical profits don’t matter as much as potential losses. If you want to be a profitable trader you must remove the potential for big losses from your trading strategy. Exit early when you are proven wrong at a key level that price shouldn’t go if the trade is going to be a winner.

Your system is more important than your prediction.

A repeatable systematic trading process with an edge can make you money in the long-term while predictions are typically just one and done events. A profitable trader needs a quantifiable system, signals, and watch list that creates regular viable opportunities for profits.

A trading edge is more important than an opinion.

An opinion is rarely a monetizable asset in the financial markets. A trading edge is the monetizable asset that allows your winning trades to add up to more than your losing trades over a large sample size of entries and exits. Having strong opinions about where price action is going in the future is usually the characteristic of the unprofitable trader not the winning trader. This can be seen most in the annual prediction from professionals, analysts, and commentators on financial news networks. Also the fact that approximately 90% of managed mutual funds and 80% of hedge funds underperform the S&P 500 index annually shows that opinions are worst than average.

What does make money? A statistical edge over competitors in the market. This comes from following price action, trends, and the path of least resistance not opinions or predictions. The financial markets can only be followed not projected as they are far too complicated to guess what will happen next due to endless variables of traders, investors, governments, politicians, and central banks.

Position size determines trading success.

One of the main reasons that traders lose all their trading capital is because they don’t understand the math of capital destruction. The math of least resistance is compounding capital. Getting back to even after losing capital is multiple times harder than just keeping it and growing it in the first place.

The larger your position size, the greater your risk per trade and the quicker you will lose it when your trades move against you. Once your capital is in a drawdown, it takes a larger return to just get back to even.

A 10% loss requires more than an 11.1% return just to get back to even.

If you have $100,000 and lose 10% to go down to $90,000 you need an 11.1% return to get back to $99,900.

A loss of 20% of your capital requires a 25% return to get back to even.

If you have $100,000 and lose 20% to go down to $80,000 you need an 25% return to get back to $100,000.

A 50% loss of capital needs a 100% return just to get back to where you started at.

If you have $100,000 and lose 50% to go down to $50,000 you need a 100% return to get back to $100,000.

Risking 1% of your capital per trade puts you in a drawdown of a little less than 10% after 10 trades. You trade slightly smaller position sizes as your total capital is reduced. 1% of your capital is less and less as it gets smaller. A 1% risk is $1,000 if you stop loss is triggered with a $100,000 account. A 1% risk is $900 if you stop loss is triggered with a $90,000 account.

Risking 5% per trade puts you down 50% after 10 trades.

No matter how good you are or how good you think your trading strategy is, you can’t trade so large that a single losing streak ruins you. If you trade with a huge position size versus your total trading capital, even a few losses in an overall winning streak will destroy your capital.

You’re not going to be perfect as a trader and when every time, that is virtually impossible. You must play the risk management defense needed to protect your trading account from huge drawdowns during losing streaks. You will have streaks of of only 50% win rates and most traders have streaks of 5 to 10 losing trades in a row at some point each year. The important question is, will your trading account survive them with your current position sizing, stop loss placement, and risk exposure?

New traders eventually give back all their trading profits every time because they exposed their capital to too much risk in a single trade. New traders haven’t been profitable yet long-term because their losses have destroyed their capital. If you want to make and keep profits in the markets you must structure your position sizing so your losses don’t destroy your capital after every losing streak. You must be able to keep your profits once you make them. Consistent position size helps with this, and is a must.

Ego and emotions are expensive in the markets.

Thinking you’re smarter than the market creates the dangerous dynamics of holding losing trades, trading too big, and thinking you’re right and the market is wrong. Fear causes traders not to take their entry signals. Greed causes traders to trade too big. Fear of missing out causes late entries in a trend that is reversing. Hope causes losing trades to be held hoping they get back to even. These are all characteristics of unprofitable traders.

These are lessons I learned the hard way by paying tuition to the market early on in my trading journey. Learn them from me or learn them the hard way.

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

By Steve Burns

After a lifelong fascination with financial markets, Steve began investing in 1993 and trading his accounts in 1995. It was love at first trade. After more than 30 successful years in the markets, Steve now dedicates his time to helping traders improve their psychology and profitability. New Trader U offers an extensive blog resource with more than 4,000 original articles, online courses, and best-selling books covering various topics.