How I trade for a living.
1. Develop systematic trading rules for short term trading (Day Trades & Swing Trades)
2. Implement these rules blindly during market hours. (No questions asked. If there is a signal, take it)
3. Review the performance of the rules every month.
4. Every day, work on new ideas, plans, meaning : the main task is research.
All trades have stop losses
Percentage winners are 40. Means 60% of trades are losers.
Profits must be run to the maximum possible.
What is the Arithmetic ?
What follows is a theoritical example. Say, there are 100 trades in a month.
40 winners make average 15 points each (after costs). Total 600 points
60 losers lose average 8 points each (after costs) Total 480 points
Net gain: 120 points
Why trading is difficult for most people ?
Not willing to take losses. Most will not be able to take 60% losers.
Not willing to understand that Market movements are unpredictable. Here is an example. There are 60 losers. But the losers are likely to be distributed un-evenly. Maybe 10 losers came in a succession (one after the other), then six winners came, then one loser, then one winner.....Most traders will not be able to handle 10 losers one after the other.
Not willing to take profits. Most traders will jump to cash in a few points. They miss out on the really big moves that can make a year of trading.
Why I can do this ?
First, I have given my dues to the market. This means I have made many mistakes that traders make. (luckily, I always kept my positions small, so I was saved from any 'wipe out' ).
Next, I have confidence in my trading methods. Why ? I spend a lot of time doing tests over past data. If the method has made money over the last two years, it should make money in the future. If the method has given 12 losses in a succession in the past, it is likely to do so in the future. And so on....
What are the basic principles of trading ?
Cut your losses short.
Let your profits run
Follow your rules