Ingredients to a Profitable Trading Methodology

By | July 25, 2014

As people get into this great business of trading, many are exposed to a heck of a lot misinformation.  So, that being said, let me lay out what I truly believe are the 5 keys to a profitable trading methodology:

  •  Reliability.  This basically means at what percentage of the time do you actually make money?  A lot of people (most in fact) emphasize this.  Many traders want to be right on every trade because they were taught that 70% or less is failing.  NOT in trading though, you can be right only 50% of the time and still make a lot of money…as long as you have the other four keys in place

 

  • Risk to Reward Ratio in other words, this is the relative size of your profits compared with you losses.  Ultimately you want to have a 2:1 (or better) risk to reward relationship when first putting on a trade.  However, this may be pretty difficult to find.  It would be more realistic to find (or create) a trading methodology that has a 1:1 risk to reward relationship; then once you factor in your ‘trade management’ to the trades it comes out to a 2:1+ risk to reward type of trade.  You’ve heard this many times before I’m sure, and it applies here too:  cut your losses short, and let you profits run.  It’s obviously one of the keys to successful trading, but is very hard for many traders to do.

 

  • The number of your trading opportunities.  This means how many trades does your trading methodology actually generate?  If your system only generates, let’s say only 25 trades a year (for swing or position trading), that’s fine, but you’re limited to how much you can make due to the low amount of trade set ups.  However, if you have a system (trading methodology) that trades five or ten times that amount (25)you will make a lot more money, assuming that the other 4 keys are in place that are outlined here.

 

  • The size of your trading capital.  Let’s face it, if your trading account is real small (i.e. 50000 to 100,00) it’s harder to make really good returns.  But, when your account is larger (i.e. 500,000+) it becomes easier to make good returns.

 

  • Position sizing strategies.  Position sizing strategies tell you how much to risk throughout the course of a trade.  It’s an essential ingredient to the whole money management philosophy.  In fact it’s so very important that without implementing a position sizing strategy the chances of you succeeding are doubtful.  Position sizing is responsible for about 90% of your overall performance variability; that’s how important  it is.

So, there you have it, the five keys to a profitable trading methodology once again are:

1.  Reliability,
2.  Risk to Reward Ratio,
3.  Number of Trading Opportunities,
4.  Size of Trading Capital, and
5.  Position Sizing Strategies
And regardless of the market or time frame you decide to trade, all five of these keys are important to a highly profitable trading methodology.  At the minimum, you need number one (Reliability), two (Risk to Reward Ratio) and number five (Position Sizing Strategies) to make a lot of money in the markets.  So, I urge you to honestly evaluate your current trading system/methodology to see how it stacks up against these five keys in a successful trading approach.

6 thoughts on “Ingredients to a Profitable Trading Methodology

  1. Harish

    Good Day,

    I am new to stock markets and i went through technical analysis books and internet sites. but apart from technical tools, your above inputs are really really helpful. Thanks a lot and keep writing.

    I am also learning about neural networks for analysis of stock markets. Can you please advise if it really works as I am unable to find reliable source of information on this.

    Best Regards,
    Harish

  2. senthil

    Good informative post. but as i am new to trading, can you explain me in details about position sizing stratigies?.. Thank you.

  3. Haresh

    Bramesh sir
    Your every post is very informative and real time useful related to market and every time you come with such a innovative information that’s it’s make useful and eye opener for every trader
    Thank you very much for such wonderful work
    May god bless lots of happiness and success

    Regards
    Haresh Baraiya

  4. jagadish

    Sir
    Great technical analysis and very informative tutorials. Thank u

  5. vikas kumar

    GREAT post sir.
    time to time you keep on reminding through your posts.
    thanks
    regards
    vikas kumar

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