Ever get warped into trying trading as a means of growing your wealth beyond the natural rate of what the market returns for some extra extra income? If so, you’re not alone. In the last couple of years, Robinhood investing has taken off, growing to 22.8 million traders (as of March of 2022) and bringing in a fresh new generation of investors eager to dip their toes into some risky bets with the goal of trying to get ahead. A small fraction of them have been successful at it by either getting lucky or genuinely crossing a strategy with an edge that they can replicate over and over again. But the truth remains that the vast majority of people have not been successful at trading over the long term. Trading is actually one of the hardest professions out there. In spite of that, it’s still possible to craft a successful career within it. Here are 5 tips on becoming a profitable trader that we live by day and night.
Never rely on trading for income
We’ve seen this all too much. People enter the stock market with a $10k account, and then say that their goal is to bring in 2-3k per month in supplemental income. In other words, they expect a total annual profit of 24k - 36k per year on top of a 10k investment. Sure, returns like that are completely plausible and honestly do happen here and there, but if you ask someone to do this for 3, 5, or dare we say 10 years in a row — good luck with that. They would theoretically quickly become the richest people on the planet if they just scaled up their approach. And no, it’s not “hard” to scale most trading strategies.
But the bottom line here is that trading is often messy, unpredictable, and very dynamic. A strategy that works nicely in one type of market often doesn’t work in another type, even with virtually identical setups. That’s just a reality that we have to live with as traders and it does make this one of the hardest professions since it requires constantly adapting. So often times you’ll notice that some months you can extract a great deal of income, while other months you might fall well short of your goal, or even possibly run a negative P&L and be forced to withdraw money from your base account balance. It sounds nice in a perfect world, but doesn’t really work in practice.
Do not set performance goals
The market has a mind of its own. Your returns are in fact not a product of your own hard work unfortunately, but actually a product of the market’s outcome on any given day. The market is essentially an aggregate of all human emotions and will sometimes trend predictably, and other times move randomly. Traders often set arbitrary goals — You’ll hear stuff like “I need to make 10% per month minimum” or even “I’d like to make 1-2% per day on average.” This all sounds cute for experienced traders to listen to because it doesn’t happen practice.
When you’re subjecting yourself to these “goals” early on, you’ll find yourself going down the rabbit hole of trying to meet the bare minimum under virtually any circumstance. Let’s say you set a target of 10% per month and you’re up a nice 8% so far but only have 3 days left on the month. You will be so eager to hit your goal that you start forcing some B, C, or even D grade trades to make up for the difference reach it. Some months it might work out, other months you’ll likely end up giving back a chunk of your gains and you might end with just a 3% month or maybe even a down month because of a few bad decisions. Then you’ll feel the need to make up for this deficit the following month, which may result in additional forced trades, and before you know it you’ll be sucked into an endless emotional train wreck loop that blows your account up. Early on, you’re best off avoiding these entirely.
Learn when to scale back, stop, or walk away
With just how dynamic the market is, it’s easy to fall into a rut where your performance instantly turns and takes a dive along with your account balance. This happens to every trader regardless of their tenure or years of experience. What separates unprofitable traders and highly profitable ones is how they react during these pivotal times. Some of them will double down to make up for losses and dig themselves in an even deeper hole. This is the recipe for taking years of gains during excellent market conditions and giving all of them back plus some more in rough markets. We’ve seen traders who made fortunes coming out of 2020 and into 2021 when we had some of the cleanest bull runs in history, only to lose it all in the first 3 months of 2022.
Learning how to navigate your weaknesses is a critical step to master as a trader. If your strength is buying call options during bull runs, then don’t think you can instantly pivot and become a pro at buying put options in a bear market. What could you do instead? Probably lower your position sizes by at least 50-80% to start off, increase your level of confidence needed to enter a position, and overall just scale back activity until the market glory returns. Your goal during rough patches should always be trying to lose the least amount of money possible until your ideal conditions return. For some traders, that means even stepping away from the market entirely until they start to see high quality setups with follow through return. But you have to understand that different times call for different allocations and exposure to risk. The faster you catch on and migrate during your downturns, the better you will perform over the long run.
Never get married to a scenario
Humans are egotistical. One of the biggest issues with managing human emotions boils down to admitting that something that you have strong conviction in is actually incorrect. We all struggle with this in one form or another. Traders are no different. Even A+ quality setups can fail and some traders can get so attached to a particular name or outcome that they’ll be willing to lose for a very long time until proven “right.” Let’s say that you think a particular stock is going to breakout with a setup that you’ve won countless times in the last year with a 100% success rate. You’ll feel invincible by now and feel very confident that you’ll win this trade and even introduce a slightly larger position size than you typically run. The setup even works at first, but then instantly go against you. You hit your typical risk mitigation point, but brush it off and just justify it as an “early entry” and then decide to add more into it. And then it continues to go against you. You add even more. And before you know it, you’ve given back 3-4 months of gains in a single bad trade.
The following scenario occurs more frequently than people think and to even experienced traders out there. Your biggest enemy is your ego and emotions, and the biggest danger to any trader is recency bias on performance. That goes the other way too, when traders suffer from back to back losing trades and then start forfeiting future setups that end up working out. The best traders understand that they’re never going to be right all the time, and even go into trades expecting to be wrong just to set the correct expectation mentally. Along with this, the dynamic nature of the market forces traders to realize that often times even something you believe very strongly will happen can go the other way in the blink of an eye. The market is ultimately controlled by everyone else’s votes far more than yours.
Give it time and don’t quit
After seeing countless markets and mentoring thousands of traders along the way, we’ve seen countless folks who will “try” out trading and quit if they lose one or two trades. Or perhaps they’ll try to pivot to another strategy that works out initially but eventually stops working, forcing them to pivot again. It’s these types of traders that the market loves, because they’re slowly giving all their money to the large institutions as tuition to the market. Just like casinos that love gamblers who will continually try out different games, different strategies, and even different casinos, at the expense of their own lack of commitment to mastering a strategy or process. Just because something doesn’t work out for you does not mean it’s “the wrong way” or that you need to quickly shift gears to find a better approach. No, in fact you should try to spend as much time as possible to study up on the situation and assess why or how your strategy failed. Additionally, try to come up with rules that will prevent this particular outcome again in the future.
Of course, you’re finding time and time again that something just isn’t working after months of dedication and making small adjustments to a strategy, then perhaps it really is time to shut the door on a particular strategy and try something else. But you should still try to dedicate as much time as possible towards studying and trying to improve yourself overtime because the difference between you and a highly profitable trader can easily be a lack of dedication.
These are just a few rules we’ve devised overtime after seeing dozens of different types of markets over the years. Even we can’t admit that we’re perfect or immune to roadblocks during our trading journey because times like now are hard for everyone across the board. But one thing we’ve been doing much better than other traders is going into strict damage control mode and entering all of our positions with a very disciplined approach. Along with this, we’ve rolled back most of our trades to “nibbles” to make sure that we focus on sustaining for now until the right time comes for us to get aggressive again. If that means being only profitable by 10-20% on a year that the broader market may be down 35%, we’re still going to be far ahead of the crowd. If these tips on becoming a profitable trader resonate with you, give us a try sometime!