In the book Trading In The Zone, Mark Douglas makes some great statements that I truly believe are important. He states:
I AM A CONSISTENT WINNER BECAUSE:
- I objectively identify my edges
- I predefine the risk of every trade
- I completely ACCEPT the risk or I am willing to let go of the trade
- I act on my edges without reservation or hesitation
- I pay myself as the market makes money available to me
- I continually monitor my susceptibility for making errors
- I understand the absolute necessity of these principles of consistent success and, therefor, I always follow them with confidence and joy.
What you’ll notice about his statements is that it is he is assuming that you have already done the first set of bullets up top; that you have already created a plan and you already have a set of RULES. Now you might ask, how do I know if my set of rules now will work next month or next year? GREAT question. The market dates back all the way into the late 1700’s. There is literally a few HUNDRED years of data. That’s why I say that back testing is KEY. Now that doesn’t mean that you need to back-test 200 years of data. Not even close. You want to back-test a reasonable time depending on your time-frame of trading. For example, if I plan on trading based on a daily system, then I might back-test the last 5-6 years. If I’m going to trade based on an intra-day 3 minute chart, I would probably backtest about a year. There is no way to KNOW what is going to happen, but trading really boils down to probabilities. Time and time again the same things tend to repeat themselves. Why do you think the markets tend do to the same things over and over. Why does it seem that certain stocks that are in the same class look the same from a chart perspective? How come a company will report great quarterly results, but still go down? It’s because there is a greater number of traders that BELIEVE that this is where an equity is too much or too little. Why do you think there are people who are talking about a “recession” right now? Again, it’s because the same things seem to be occurring that did prior to a previous recession and people have that BELIEF.
So what does all this mean? What can you gather from all this? Well, a few things actually. One is to make sure you create, find and organize a PLAN for trading. Think about it as if you wanted to open up a company. Do the research and find out how some of these traders got started and what they did. Once you’ve done that, write down your plan and look at your questions from up top. Once you can answer ALL of them, then you are moving toward being a consistently profitable trader. Then take a look at what Mark Douglas wrote. You have to own these statements mentally. You have to truly believe that you are a consistent winner because of all of the statements above.
“Plan your trade, and trade your plan” – Anonymous