Consistent Profits

If there’s one character trait you want to incorporate into your trading business, it’s consistent profits. In the trading book gem Trading in the Zone, author Mark Douglas lists the best traits he has found in consistently profitable traders. I have modified his criteria slightly and will follow with a brief explanation.

Objectively identify your edge in each trade.

This infers you do your homework. Here, you look for an edge, specifically an indication of one thing happening over another. Whatever you’re trading, your edge gives you a greater likelihood of success of bringing in a profitable trade. The edge you identify is based on your own analysis. It’s your trade, based on your psychology.

Predefine the risk in every trade.

Here you determine how much cash you are putting at risk. This is based entirely on your risk tolerance. Perhaps you decide you never want more than five percent of your account in any one trade. Simply calculate five percent of your account, and limit your trade to that amount. If you skip this step, you could be toast in a hurry.

Act on your edges without reservation or hesitation.

I use alerts to notify me if a position is ripe for harvest based on my objective analysis. When I get that buy or sell signal that tells me my edge is on, I pounce and respond like a knee tendon getting the reflex hammer tap. No thinking, just trading. If you fail to act, it means you didn’t do your homework on the trade in advance, and you lack the confidence to risk your capital.

Completely accept the risk, or let the trade go.

Once you enter a trade, you must feel comfortable remaining in the trade to let it play out. If you have an edge and remain confident, stick to your plan, and see it through. Monitor your trade for clear errors on your part. If you find an error in your perception of the trade, take action. If you no longer can accept the risk of capital traded, cut the trade immediately. Next!

Pay yourself as the market makes money available.

Get in the habit of taking profits out of your trade. There is no need to wait for the homerun when a base hit also brings in the cash. By taking a portion of your trade off in profits, you assure yourself of at least some profits and can reload for more trades. If you have five contracts in a trade, take two off in profits early, and let the others ride. Ring the register! No one ever got hurt taking a profit.

Enuf said.