As humans, we have hundreds of thousands of years of mental programming from our ancestors. And many of that programming is all about avoiding risk and running towards safety. But trading, however, is all about taking on risk without emotion. I think this is one of the biggest roadblocks to keeping traders from becoming consistently profitable.
When a new trader loses a trade, there’s typically a negative emotion associated with taking a loss. But professional traders know they can lose a big percentage of their trades and still be profitable.
Key #1 – What’s The Difference Between “Trading” And “Gambling”?
Some people who don’t understand day trading will say that trading is nothing but gambling. And it’s true, many traders treat the stock market like a slot machine, just hoping and praying that they’ll get lucky and make a bunch of money.
At E-mini Academy, we teach our students how to “think like a casino”, not like a gambler. That’s all about knowing your statistics. You must understand how to calculate win ratio, risk-to-reward ratios, and other key statistics. If you don’t know these numbers, then you’re basically just guessing.
Key #2 – How To Analyze Trading Statistics & Results
Here’s a snapshot of the last 30 days of e-mini futures trading days. Notice how not every day was profitable. In fact, there were 7 winning days and 5 losing days. But the most important thing is to recognize that, on average, the winning days were bigger than the losing days.
Now let’s drill down and look at a trade-by-trade graph. Just like the daily chart, notice how there are more “green” (or profitable) trades, and the average winning trade is further above the zero line. There are just a few red trades that are “further” below the zero line.
Another key stat you want to know is what time of the day most of your profits come from. You can see that over the past month, most of our profit potential has been before lunch, with market open being slightly down.
So, even though we didn’t win every trading day, notice how there’s a nice up-trending equity curve. The goal here is to control drawdowns as much as possible. All trading strategies will have drawdowns, but a good trader knows when to cut it off so he/she doesn’t have unnecessary losses.
I think the key to trading is to forget about crazy gurus, hot stock tips, or holy-grail trading systems. My message has always been to use a fully-tested, rules-based trading strategy and get with a community of like-minded traders who can help you become an become an independent trader.