Good Trades; Bad Trades.
Over a course of an active trader’s career one must take thousands of trades. Over the years there are bound to be a few great trades and a lot of terrible ones. I want to break down what makes a good trade and what makes a bad trade.
Let’s start with a bad trade. A bad trade begins when the trader enters the market impulsively without doing the research or having a great reason why they entered that position. This is also called trading without an Edge. The trader now is completely dependent on the whims of the market; he has no idea about randomness and probability – one of the first lessons he needs to understand to trade successfully.
The bad trade also does not take money-management into account. Meaning, he has exposed a large amount of his capital on one trade. And if the trade should move against him he will lose a significant chunk of his total capital on this trade, which he inevitably does.
Because the trade is floating in the market without an Edge, and it is a large position, now the trader is fully emotionally involved in this trade. He cannot stop thinking about it. A thousand fearful thoughts dominate his mind about how the trade will move against him, how he will lose money again, how stupid he really is. He is angry and confused and frustrated to no end.
These unfortunately are bad trading habits and unless you progress and change them, you will quickly die out of this profession.
Good trades on the other hand do not come easily. It takes years of acquiring knowledge, research and practice. Now, it is not an impossible task, in fact it is not even a very difficult task, but it does require the trader to do some serious work.
A good trade begins when the trader has the patience and discipline to wait for his Edge to appear in the market. The moment he sees his Edge appear on the chart the trader will enter the position, because he knows this is his only opportunity to make money in the market. Because he has back-tested and live-tested his Edge in the market he knows the probability is in his favor to make money, but if the trade should fail he moves on because he understands any trade he puts on is a random event. He understands the nature of the market, which means he understands the role of randomness and probability in trading.
A good trade only exposes only a very small amount of the total account equity in any one trade because the trader knows any trade you put on is random. He understands that any trade can fail so he does not expose more than 2% of this total account equity on any one trade. If this trade moves against him the Stop-Loss will exit him with a loss of 2% but if the trade should go for him, he takes as much as possible from the market, sometimes scaling into his winners. This is efficient money management, which protects his capital and builds great trading habits.
Having great trading habits and a system that he trades with, the trader with good habits has almost no emotional involvement in any trade he is in. He is not angry, frustrated or confused. He is protected by his rules and discipline, he knows any loss on any trade will be a very small amount compared to his eventual winners which come frequently. Safe in this knowledge the trader enters the market over and over when his Edge appears because long term he knows he will be net profitable.
If any of this is not clear please read https://nepalitrader.substack.com/p/tools-required-to-be-a-successful