You might be thinking…
Trading is clicking a few buttons and drawing some squiggly lines and POOF – money is made.
So you dive straight into trading and POOF – your money is gone instead.
Obviously, trading isn’t as simple as it seems.
Especially if you don’t have a plan to start with, you’ll get “eaten up” fast.
So what do you actually need to succeed in trading?
Don’t worry, that’s what I’ll share with you in today’s episode.
You’ll discover how this one simple formula can transform the way you trade, and get you towards consistent profitability (even if you have been losing for years).
So tune in right now…
Hey, hey, what’s up my friend?
Welcome back to today’s episode where you’re guaranteed to learn how to become a winning and profitable trader.
I know that’s a strong word to use, but you’ll understand why later on.
So when you want to find success in trading or anything that matters, be it business or whatsoever, you must have a frame.
You can’t just go in blindly and you start shooting arrows and hopefully, you hit something.
That’s not how this works.
It’s kind of like me giving you a map and a compass. And I tell you that you’ll find treasure at the spot X in the map worth $10 million. It’s yours for the taking.
Now let me ask you…
If you only have a compass and a map on hand, how confident are you to reach that $10 million on the first try?
Well probably not, right?
On your journey towards the $10 million, you’ll likely encounter an obstacle, maybe a big hairy monster in your path and you need to backtrack to avoid fighting the monster.
Maybe you encounter a huge mountain that’s so high that you can’t climb it and you’ve got to skirt around it and find ways to overcome these little obstacles in your way.
Every obstacle that you overcome, brings you closer towards the goal – the $10 million.
This is the same for trading.
You’ll face obstacles in the way, and you’ve got to find ways to overcome it, circumventing, and improve on your processes before reaching your end goal.
Let me share with you a framework that accomplishes this for you.
This framework is what I call the D.E.R.R. framework.
Let me explain.
D – Develop your trading plan
Before you put on a single trade, you got to define your plan, your strategy.
This means that you’ve got to identify the market conditions that you’re trading. Whether you’re trading in a trend, trading breakouts, trading pullbacks, etc.
Then define the entry condition, how will you enter the trade: limit order, market order or a stop order.
Then you’ve got to define your exits, how will you exit the trade: is this a swing trade, a trend-following trade.
You’ve got to define the markets you’re trading: is it FX, stocks, etc.
You’ve got to define your risk management, how much are you risking per trade.
You can see that all these questions will form your trading plan.
And that’s the first thing you need to do, a consistent set of rules to follow, which is your trading plan.
E – Execute your trades consistently
You must execute your trades consistently and get a minimum of 100 trades.
Because in trading, 1 plus 1 may not be equals to 2.
You’re not dealing with certainty over here, you’re dealing with probability.
So it’s more like 1 plus 1: 60% of the time it might be 2 but 40% of the time, it might be 20.
You get my point.
You’re dealing with probability in trading nothing is certain.
That’s why you need a large sample size of trade to find out whether a trading strategy works or not.
The minimum is 100 trades to execute it consistently.
Because if you don’t have a large sample size of trades, and you only have a sample size of let’s say 7 or 8 trades, you could be in a losing streak at the start of your trading. Then after 5 or 6 losses, you claim that it doesn’t work and you abandon the strategy.
But maybe the next 90 trades you’ll realize that that strategy actually makes money in the long run.
It’s kind of like having a coin in your hand.
So every time it comes up head, you win $10. Every time it comes up tail, you lose $5.
Let’s say for the first 5 coin tosses, it came out all tails and you lost $25.
Are you going to stop tossing the coin and say that coin is cursed, it’s not working? No right.
Because if you know that you have an edge in the markets right, you need to toss that coin, maybe 100, 200 times, before your edge can play out.
This is the same for trading.
You’ve got to let the law of large number of work in your favour.
Execute your trades a minimum of 100 times before you conclude whether the trading strategy works or not.
R – Record down your trades
You want to record and journal down your trades.
This means that every time you put on a trade, you’ve got to write down whether it’s a winning trade or a losing trade.
You’ve got to screenshot the chart, so you know:
- Where you enter and where you exit a trade
- What is the profit or loss on a trade
Let’s say you risk $100 on a trade and you make $200.
That’s a profit of 2 R. 2 times your initial risk. So write down there, 2 R.
Maybe you took on a trade but it’s a loss of let’s say $50. That’s half of your initial risk amount. So you put a loss of -0.5 R.
What you want to do is to record down your trades. So you have a matrix that you can track.
R – Review your trades
Finally, what you want to do is to review your trades.
Find out right whether a particular trading strategy is making you money or costing you money in the long run.
So let’s say you had executed that 100 trades and right now, you’ll know what’s your:
- Ratio and winning rate
- Average risk to reward on a trade
And if you find out this strategy is actually not so profitable, maybe just mediocre and allows you to breakeven.
What you can do, is to look at the charts that you have saved earlier and ask yourself:
Among all the 100 charts out there, are there certain patterns that lead to your winners?
Maybe there are certain patterns that you realized actually lead to a higher probability of a win.
And also, are there certain patterns which tend to lead to a loss.
Once you’ve asked yourself those 2 questions, you want to avoid taking those trades which have a lower probability of success and instead, focus on taking those trades which have a higher probability of success.
After that, you can go back to your trading plan and make the necessary tweaks before executing, recording and reviewing those trades once again.
This is the framework I’m sharing with you.
If you follow this framework, there’s no reason you’re not a consistently profitable trader.
Is it difficult? Is there work involved?
Yes, there’s work involved. It’s tedious, but this is the way it’s done if you want to be a profitable trader.
This is coming from a discretionary trading point of view. Systems trading is a different thing altogether.
And if you’re interested, we can talk about that in another episode.
So with that said…
Here’s a quick recap on the D.E.R.R framework:
- D – Develop your trading plan
- E – Execute your trades consistently
- R – Record your trades
- R – Review your trades
So with that said, I have come to the end of today’s episode and I will talk to you soon.