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

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 systems 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 rime 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 Elliot 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.

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 is all that is important, there is no reason to try to predict the markets in the first place. This is the reason system 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 system. 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 system 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 system or the market. These are the same practices that you will learn to include in your trading system.

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 system 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 system. 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 system 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 system trading disciplines, you will make money whether you try to predict the market or just trade a good system. You might as well save yourself a lot of time, energy, and mental anguish and trade a good system.

-Excerpt from 'Trading as a Business' , next post 'Be In Harmony with the Market'