Stock Market Questions |How can I be a consistently profitable stock trader?

How to be a consistent. How can I be a consistently profitable stock trader and have the discipline to stick to my trading system?

So there's two parts to this. The first thing is being consistently profitable, and the second thing is having the discipline to stick to your system.

And I want to be clear that trading is not like a day job, okay? There is. Compared to going to work, getting paid, there is very little consistency in your returns from the market, right? It's not like you're going to earn a hundred dollars every day or $1,000 every day or $10,000 every week or anything like that. It does vary quite a lot. So the first thing to realize when you're going to become a trader is, is that you have to accept some uncertainty in your income. And so you need certainty as a human being. We need certainty, right? And a lot of traders will say, well, how do I make $100 a day? If I could just make $100 every single day, that'd be perfect. I'd be on my way, right? But thinking about trying to force a certain profit, a certain consistency out of the market is going to cause you to make mistakes and it's going to cause you to do things that sub optimize your performance. Because if you try and take $100 out of the market every single day, you might miss the big update where you could have made a thousand dollars, right? Because you just took your, you took your profit too early because you got your hundred bucks, right? So in order to be consistently profitable, think about longer term, right? And think about, how can I make money every year or most years to start with, okay? That's the first step. And then once you're making money most years, how can I make money most quarters? And then how can I make money most months? Okay? If you start out thinking, how can I make money every day? It's going to be a very hard journey for you and chances are you will lose all of your money trying to do that. Because the sort of trading methods that do give you very regular returns on a daily or a weekly basis tend to have a huge tail risk and cause you to blow up when the risk actually comes to bear. Okay, so that's just a bit of context for consistent profitability and trading. Think longer term than you would in your day job, okay? Think over months and quarters and years rather than days and weeks for your definition of consistent. Second thing is, in order to be consistent within those time frames, you need to be able to make money from the different types of market behaviors that Happen. Okay? So markets can do several things, right? Markets can go up, markets can go sideways and markets can go down. And if markets are going up, they can do three things next, right? They can go up, they can go sideways or they can go down, right? And if markets going sideways, they can do three things next. They can turn and go up, they can keep going sideways or they can go down, and so on. You get the picture. So what you want to do to be consistently profitable is have a system or a set of rules that will make money from various different market behaviors. Most traders start out making money from just alongside. Okay, if I buy stocks, they'll go up, I make money. Okay, that's good, that's true. And I did that for the first, probably what, five, seven years of my trading, and I made a ton of money doing it. But you won't make money every year doing that because there's going to be down years and there's going to be sideways years. So you want to expand your horizons as you grow as a trader to be able to make money from more and more market conditions.

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So if you start out, you want to start somewhere easy and natural for you. And for most people, buying stocks on the long side is the easiest and most natural. Shorting is kind of weird, right?

But if you buy stocks and they're going up, you're going to make money in a bull market. If you buy strong stocks, even if the market's going sideways, the strong stocks can go up, right? So a trend following system is often the best place to start because it's a very forgiving way to trade. The average winners are huge compared to the losses and you don't have to do much. So if you make little mistakes, it doesn't matter because you're not trading 50 times a day. Okay? If you start out trading and you're day trading, you're trading many times a day. If you make any little number of mistakes, they compound on themselves and you very quickly lose money. Okay? So you want to start somewhere that's fairly forgiving, like trend following, and then branch out into systems or approaches that make money in different market conditions. So that might be, you know, maybe you've got a trend following system, so then maybe you have a mean reversion system which buys on a dip to profit from the rally, right? So that will, your trend following system might hold through all those dips and rallies. A mean reversion system might just profit from the spring bank the reversion to the main, and then you might say okay, well, now I want to make sure that if the market really turns down and goes down for a long period of time, I'm going to make money. So then you need a short selling system, short side system. And so you need a system that will enter when the markets are weak and likely to continue. The dynamics of a short selling system are completely different then the dynamics of a long side system. And so you need to first learn the long side and have a system that makes money consistently and then learn the short side. And you know a great way to do this, like in my students in the trade of success system, get access to a whole bunch of different systems, right? Some long, some short, some long term, some short term. And the idea is you take a few of those systems that you like and you assemble them into a portfolio that makes money in different market conditions. And that's how you become a consistent stock trader, by building, starting profitable with one system and then diversifying into systems that make money from different market conditions. Now the second part of this question was, how can I be disciplined and stick to my stock trading system or any system for that matter, whether it's a forex system or a future system or whatever, how do I develop the discipline to stick to that? Well, the discipline comes from your level of confidence. Because if you know that that system is profitable, if you know that that system outperforms your crazy tendencies. My crazy tendencies. And if you know that you've tested it, that system, every time you look at a trade, the system generates and you have a reaction to it and you go, oh, I don't want to take that trade, I should filter that out. And, and you've tested that idea, that filter that you've come up with and you found that, oh, that makes it worse, then you can build the confidence and the discipline to follow the system. So the first thing that you need to do to build that discipline is to have a consistent set of rules where you're not.

Where you're completely clear on what you have to do when you buy, how much you buy and when you sell. So you need to be crystal clear on exactly what the rules are. If there's any ambiguity, you will not be able to muster the confidence and the discipline to be able to follow those rules consistently. So you need to eliminate ambiguity, which means writing down your rules, codifying them so that you know precisely when the buy is and precisely when the sell is. That's the first step. Second step is to back test those rules. It's no good saying, hey, I looked at a few charts and I look at this indicator and look, it would have bought here and it would have sold there and I would made this much money. And then, oh look, there's another trade here. I would have bought there and I would have sold there and that would have made money. That's not back testing and that is not going to give you the confidence to have the discipline to follow your system rules. Real back testing is when you take your codified rules, your, your specific rules and you put them into a piece of software like amibroker. What I use and what most of my students in the trader success system use for backtesting, put them into Amibroker, you back test them over 20 to 30 years of history, generate several thousand trades using those rules and verify that the system is profitable, that it is stable over time. It actually makes money over time, that edge is not decaying and that those rules are robust. And robust means it. If you've got, let's say you've got a moving average, say you got a 200 day moving average in your system. Just for an example. If it's a 200 day moving average and your system is profitable, well, if you Change it to 180 day moving average and the system's not profitable anymore, there's not a good system. So you need to have confidence in your system that your system is robust. Robust means if you vary the, in the indicator parameter values a little bit, it won't matter, right? It'll still make money. So you want to, if you, let's say again with the 200 day moving average example, when you backtest your system, if it back test profitability with 200 day moving average and it also back test profitably with 150 day moving average or with a 250 day moving average, you've got a high degree of confidence that that rule works, right? Because it doesn't matter. You don't have to fine tune it to make it profitable. It's about having a robust system. So when you back test your systems like this, you build that confidence. And then when you trade them, you're looking at each signal the system is generating and then you observe your emotions, okay? Observe your emotions as you're trading these systems and you'll get us, you'll get a signal go, oh, that stock, look how gappy it is. I don't want to trade that. It's like, ah, that's not going to be profitable. Okay? This is the emotional reaction we have when we trade systems. So what you do is you say, you first of all observe, you had a reaction. Step one, step two, look at the chart and say, why did you have a reaction? What was it that you reacted to? And in this case, it was the gappy stock chart, right? There was gaps all over the place. So the third step is to take that observation and convert it to a rule. I don't want to trade a stock if it has lots of gaps. So then you write a filter to eliminate those sorts of stocks. You put that filter into your system and you back test it with that, with that rule, back test it with the rule, back test it without the rule, see which one is better. And the interesting thing or the interesting thing for your trading psychology is that the vast majority of the time when we have an emotional reaction to our trading, to our signals, it is not a profitable reaction. If I tested 98 emotional responses I had personally to trades that my systems told me to take, and I created a filter to try and remove that sort of trade, 98 out of 100 would not help, would make. They would actually make my system worse. But every now and then you'll see a trade, you'd have a reaction, and you'll come up with a rule to try and eliminate that sort of trade. And that rule will improve the system, right? If you find a rule that improves the system, then all of a sudden you're going to be able to make more money. So building this confidence, this discipline to stick to the system is first, about backtesting, second, about observing our emotional reactions and validating that those emotional reactions are unfounded by putting those rules into the system and seeing that the system actually decays. And then every now and then, we have an emotional reaction to a trade we're supposed to take. We put in a rule and we go, oh my God, this is better. It's like it's a little pot of gold you just found, right? So you can put that rule into your system and then the system will be more profitable from then on. So that's how you generate the consistent. Become a consistently profitable trader by having the right systems and then the discipline to stick to them by backtesting and then also back testing your emotions. Most traders just try and suppress the emotions, but you're human, you cannot suppress the emotions. You've got to observe them, articulate what it was, convert it to a rule, back test it, and see if that emotion was founded in profit or not, if it made the system better or worse. Most of them you'll see, make the system worse. It.