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The Principles of Successful Trading

Over many years of trading, I’ve found certain principles to be true.

Understanding and using basic principles provides an anchor of sanity when

trading in a crazy world. Whenever I find myself under stress, questioning my

judgment or my ability to trade successfully, I pull out these basic trading
principles and review them.

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Don’t Try to Predict the Future

I used to think that there were experts and geniuses out there who knew what was

going to happen in the markets. I thought that these traders and market gurus

were successful because they had figured out how to predict the markets. Of

course, the obvious question is that if they were such good traders, and if they

knew where the market was going, why were they teaching trading techniques,

selling strategies and indicators, and writing newsletters? Why weren’t they rich?
Why weren’t they flying to the seminars on their Lear Jets?

NO ONE KNOWS WHERE THE MARKET IS GOING

It took me a long time to figure out that no one really understands why the market

does what it does or where it’s going. It’s a delusion to think that you or any one

else can know where the market is going.

I have sat through hundreds of hours of seminars in which the presenter made it
seem as if he or she had some secret method of divining where the markets were

going. Either they were deluded or they were putting us on. I have seen many

complex Fibonacci measuring methods for determining how high or low the

market would move, how much a market would retrace its latest big move, and

when to buy or sell based on this analysis. None has ever made consistent money

for me.

NO ONE KNOWS WHEN THE MARKET WILL MOVE

It also has taken me a long time to understand that no one knows when the

market will move. There are many individuals who write newsletters and/or

books, or teach seminars, who will tell you that they know when the market will

move.

Most Elliott Wave practitioners, cycle experts, or Fibonacci time traders will try to

predict when the market will move, presumably in the direction they have also

predicted. I personally have not been able to figure out how to know when the

market is going to move. And you know what? When I tried to predict, I was

usually wrong, and I invariably missed the big move I was anticipating, because “it

wasn’t time.”

It was when I finally concluded that I would never be able to predict when the

market will move that I started to be more successful in my trading. My

frustration level declined dramatically, and I was at peace knowing that it was OK

not to be able to predict or understand the markets.

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Know that Market Experts aren’t Magicians

Some of the experts that try to predict the markets actually make money trading

the markets; however, they don’t make money because they have predicted the

market correctly, they make money because they have

traded

the market correctly.

THEY DON’T PROFIT FROM THEIR PREDICTIONS

There is a huge difference between trading correctly and making an accurate

market prediction. In the final analysis, predicting the market is not what’s

important. What is important is using sound trading practices. And if sound

trading habits are all that is important, there is no reason to try to predict the

markets in the first place. This is the reason strategy trading makes so much sense.

THEY HAVE LEARNED TRADING DISCIPLINE

I have watched many market gurus continually make incorrect market predictions

and still break even or make a little money because they have followed a

disciplined approach to trading. More importantly, they used the exact same

principles that I will show you how to use in creating your strategy. It is these

principles that make the money,

not

the prediction.

To be a disciplined trader, you have to know how and why to enter the market,

when to exit the market, and where to place your money management stops. You

need to manage your risk and maximize your cash flow. A sound trading strategy

includes entries, exits, and stops as well as sound cash management strategies.

Even the market gurus and famous traders don’t make money from their

predictions, they make it from proper trading discipline. Over the years, they have

learned the discipline to control their risk through money management. They have

learned to take the trades as they come, and not forgo a trade because they are

second-guessing their strategy or the market. These are the same practices that you

will learn to include in your trading strategy.

THEY PROFIT FROM SOUND CASH MANAGEMENT & RISK CONTROL

Sound money management and risk control are the keys to being a profitable

trader. I will say over and over again, it is not the prediction or the latest and

greatest indicator that makes the profit in trading, it is how you apply sound

trading discipline with superior cash management and risk control that makes the

difference between success and failure.

I often tell the story of the great fish restaurant that opened up just down the

street from my office. It opened with great fanfare and was ranked in the top five

restaurants in the city. The food was outstanding. But it only took a little more

than a year and this great restaurant was out of business. Why? Because the key to

running a good restaurant is not the food…it is cash management and risk

control. It is making sure your business is run efficiently, keeping your costs (risk)

in control, and managing your staff effectively. If you believe that the taste of the

food is what makes a great restaurant, think of how great the food is at your

favorite fast food restaurant. But, someday, watch how well that restaurant is run.

Just as in the restaurant business, the key to profits in trading is not in the

prediction or the indicator, but how well the trading strategy is designed and

executed. The ability to achieve risk control and cash management will make the

difference between a successful trader and an unsuccessful trader. If you ever have
the opportunity to watch a successful trader, you will see that they don’t worry

about where the market is going or about predicting when the next big move will

take place. They aren’t looking to tweak their indicator. They are worried about

their risk on each trade. Is the trade being executed correctly? How much of their

total account is at risk? Are the stops in the right place? And so on.

THEY DON’T HAVE SUPERIOR PERFORMANCE NUMBERS

If you want to have some fun, look at the performance of a successful market

expert, one who is known for his or her market predictions and trading expertise.

You will find that their performance numbers really aren’t any better than an

average trading strategy. The percentage of profitable trades, the return on the

account, average profit to average loss, number of losing trades in a row…all of

these trading parameters are within the average trading strategy performance

parameters.

Why is this? Because you can’t predict where the market will go and when it will

move. But if you use correct strategic trading disciplines, you will make money

whether you try to predict the market or just trade a good strategy. You might as

well save yourself a lot of time, energy, and mental anguish and trade a good
strategy.

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Be In Harmony with the Market

We make money trading when we are in harmony with the market. We are long

when the market is going up, and short (or out of) the market when it is going

down. If we bring an opinion with us while trading, we will end up fighting the

market. We keep trying to go long as the market is declining, or we keep shorting

a market that it is in a bull phase.

DON’T FIGHT THE MARKET

Fighting the market is not good for two reasons. First, we lose money. How much

we lose depends on how well we are managing our money and controlling our

risk. Second, fighting the market affects our judgment, and causes us to try to

confirm that our judgment is correct, or persist in fighting a trend so that we will

eventually prove to be correct. We figure that if we persist long enough, no matter

how long it takes, we will eventually be right.

The same can be said for being in a canoe in a river. There is a reason for leaving

your car downstream, launching your canoe upstream, and paddling downstream.

It is much easier and eminently more fun to go with flow and paddle downstream.

We could do the opposite and paddle upstream. Eventually we may even get to

our destination, but the cost would be substantial. It would take much more time,

more physical and emotional stamina, and we would be constantly fighting the

current. Reaching the goal would not be worth the cost.

Even if you ultimately make money fighting the market, it is not worth the price

you have to pay, both financially and with peace of mind.

LET THE MARKET TELL YOU WHAT TO DO AND WHEN

The correct attitude for successful trading is to let the market tell you what to do.

If the market says to go long, buy, and if it starts to go down, sell. This sounds

easy but it is much more difficult than you think. We always like to believe that we

can be in control. We want to be in control of our trading and of the market. If

you accept the notion right now that you cannot control the market, that all you

can control is your execution of trades, you will take a great step toward being a

successful trader.

Instead of trying to control the market, let the market tell you what to do. Let the

market and your strategy take you long rather than you personally trying to predict

or decide when to go long. Let your strategy take you out or get you short. Once

you realize that you can’t understand the market, and that you can’t predict when

the market will move, you will move into that detached state of mind where you

let the market take you where it will when it wants to.

THE MARKET GIVES AND THE MARKET TAKES AWAY

To remove your personal biases and let the market tell you what to do is to give

up control, to give up the notion that you are actually in charge of how much

money you make. For profitable trading, you need to move into the mental state

of letting the market determine the profits, not you. It won’t be whether you

predict the market correctly that determines the profits, but whether your strategy

is in a profitable mode or drawdown mode as determined by the market.

So, let the markets tell you what to do based on your strategy. Let it get you long

and put you short. Let the market determine how much money you are going to

make. Trade your strategy and let the market do the rest. And know that the

market gives money and the market takes away money. Your goal should be to
develop a strategy that gives you more money than it takes away.

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