1. “Let Your Winners Run, Cut Your Losses Short”

This aphorism has been repeated many times, and bears repeating, because it is a fundamental tenet of trading and investing profitability.

Think of trading and investing as a simple numbers game, where the amount of profit you make must be greater than the amount of losses you rack up.

Bear in mind that we are talking about the total amount of profits versus the total amount of losses here, not the number of profitable trades versus the number of losing trades.

The concept as a whole isn’t hard to understand, since the same applies to everyday life. If the amount you spend is greater than your income, you’re in big trouble.

Likewise, if the total amount of trading losses you make exceed your profits, your trading account blows up.

Unfortunately for most traders and investors, the simplicity of the logic behind the aphorism means that they underestimate its importance. They understand what it says, but not what it means.

If you want to be a profitable trader, especially a consistently profitable one, you will need to learn how to trade in a manner that allows your winning trades to run, while closing out your losing trades early.

Start by understanding the disposition effect, one of the most insidious cognitive biases that exist in our human minds, then move on to learning about asymmetric returns. 

2. Follow A Set Of Markets Consistently

Avoid jumping from market to market based on trading tips that are trending on social media, the financial news, or what your friends are talking about.

Following a fixed set of markets consistently will develop your understanding of how each of them trades, as well as the nuances of their price action. Over time, this understanding will allow you to identify money-making opportunities in these markets easily, and consistently.

Conversely, if you keep jumping from market to market (or stock to stock), you will not develop this understanding, and will fail to learn how to identify decent trading opportunities.

This in turn means that you will almost always fall victim to the bandwagon effect, exposing yourself to large losses, which is precisely what you want to avoid (see tip #1).

If you are interested in trading ETFs and Macro, we cover a set of the most important ones on a weekly basis, giving you updates as well as trading opportunities in our ETF Edge and Macro Edge reports.

3. STOP Trying To Make A Quick Buck

What use is a 10,000% return if you lose it?

The issue at hand here is not that a 10,000% return is bad, because it isn’t. However, trading in a manner which cannot sustain the viability of your trading account is.

Successful trading, i.e. sustainable profitability, requires a set of skills that needs to be developed, and trading to make a quick buck is a surefire way to guarantee that you will not develop them.

If you do want to develop these skills, you will need to learn from experience. This means that you will have to trade in a manner that keeps your trading account alive while you suffer the losses and mistakes that are part of the learning process (see tip #1 and tip #2).

In this light, quick and large returns are inimical to your success as you will not learn what it is that you need to do, and not do, in the markets.

Ultimately, we can only ever act within the limits of our experience, which means that we need to survive the process of gaining it.

Even if you did manage to score an initial big win, doing so will only embolden you to take other reckless bets, since you simply do not have enough experience to know better. Of course, continuing to take reckless bets means repeatedly exposing yourself to the very high risk of bankrupting your trading account, which is a disaster that cannot be undone. 

There really are no shortcuts to trading success. If you insist on finding and taking them, at least be aware that you are only sabotaging your chances of future success.

An effective trading plan will address the issues discussed above, and set you on the path towards sustainable profitability. Learn how to create your own here (it’s free!)