What did you do to become a profitable trader?

I changed my perspective.

Instead of focusing on trying to generate a profit on each trade, I focused on trying not to lose on each trade. Sounds crazy to the inexperienced trader, but if you have been doing this for a couple of decades, you know what I am talking about.

There’s only 1 way to be a profitable trader. Keep your losses small and manageable. You will have losses. They are not avoidable, but they are manageable. The best traders have lots of losing trades, but they know when to get out. Remember, you control the size of any loss, not the market.

To be a profitable trader you must have rules, and you must follow them. I have lots of rules and each is designed to keep me out of trouble. Here are 10 basic rules I follow everyday. The loss amount of $2000 will be different for each person and mine is different than this amount depending on the type of trade.

1. Do not chase the market. A missed opportunity does not cost you anything.

2. Never allow yourself to lose more than $2000 on any trade. No exceptions.

3. Trust your gut when something does not feel right.

4. Do not fall into the trap of playing defense all day.

5. The only thing holding you back are big losses. Cut losers quickly.

6. It’s better to skip a trade if it does not feel right.

7. Getting out for breakeven is a good trade.

8. If a trade is not working as expected or not acting right, get out.

9. Always expect the unexpected.

10. Never assume anything.

I want to explain #4, as I often get asked what this means. Instead of looking to initiate new trades, and manage those, I am putting on protective trades to protect a loser that I don’t want to cut loose. This is managing out of a bad trade. I can usually do it, but it consumes me and is not a good use of my trading day. It’s the byproduct of feeling very strongly about a position when it’s going against you, and you don’t want to close it out…even though you should. I have been there more times than I can count, and most of the time I can defend or negate the loss, with counter position if I have a full day. This might involve pulling the legs apart on a spread trade, buying calls or puts, etc. Keeping track of your deltas and knowing what you need and how much to abate the loss, can be difficult and time consuming, so I do not allow myself to fall into the trap.