What makes a good trade?

This is a topic that has been covered many times by many people, and a question that I am sure most readers already know the answer to.

Over the past few weeks the market has been rather tough and trading strategies and plans were thoroughly tested. Therefore this whole 'discipline' thing has been at the forefront of my mind for some time now. Few things in life are as difficult as sticking to your own rules, hence all this blabbering about sticking to your plan and so on.

To keep this interesting and counter intuitive, I'll start with all the things that a good trade is not.

A good trade is not:
A trade which made a lot of money
A trade that had a great risk:reward ratio
A perfectly timed entry, at the bottom, just before the bounce
A trade which everyone told you wouldn't work, but does, beautifully
A trade in which you captured a huge move in the share price

Sure, the above list are all things that are awesome, right? ... Wrong. Every single one if those can be put down to blind luck. Even if all of these characteristics and more are all present in the same trade, it could still not be a good trade.

So what is a good trade then, if not one that you made money on? Very simply put, a good trade is a trade that was executed exactly according to how it was planned, regardless of the outcome. By this definition a good trade could be a losing trade as well. As long as the trade was executed in accordance with how it was planned, that is all that is important.

Now I'm not saying that you shouldn't close your trade because it missed your target price by 1c. I'm saying that if you have a clearly defined plan with clear if/then rules, and you stuck to that plan, it was a good trade. Regardless of whether it was a winning or losing trade.

You see the problem is that most traders act - or trade - randomly. They take trades that are suggested to them, they don't follow money management rules and they have no clear set of criteria that define an opportunity to them. Yes, the market can and probably will reward these traders a few times for their random behavior, although over time their inconsistency will cost them dearly.

What is most important to create consistency out of chaos is to take just one good trade. Then another. Then another. Then another.

Your homework is to read; One good trade - Mike Bellafiore and, Trading in the zone - Mark Douglas.

Happy trading.

@TraderPetri
17 March 2015

The plan is to have a plan

I should rather say, the importance of having a plan that you believe in.

This is a difficult concept to get across, maybe because I am merely a student and this is one of the concepts I am struggling with, but putting it on paper had proved to be rather more challenging than what I thought it would be.

Some traders have no plan at all. Which is fine if you've been trading for 20 years and you can react to the market correctly in its infinitely various conditions. These traders are the rarest of the lot and are easily the most profitable. Did I mention that they're very few and very far between? For the most part, traders without a plan - which I am sure number in the thousands - are chewed up and spat out by the market as they endlessly engage in random decision making and never understand why they keep getting random results.

Then there is the trader who has a great plan... until they have a losing trade, at which point they get another great plan. The plan is constantly changing from one trade to the next. The plan changes half way through a trade. There is simply no discipline to stick to the rules that were created. I'm sure you can imagine how the market rewards this trader. Chewing. And spitting.

The problem here is that the trader does not believe in their plan.

So let's look at what a good plan should be. Well, good to start off with :P

1) It needs to be defined. So it needs clear entry and exit criteria along with 'if/then' scenarios. For example; what are the things (or factors) that can or should make you close a trade early? It needs to be defined. And on paper.

2) It needs to be back tested. There is no magic formula that will work forever, that much we know. There is however, a great amount of comfort that comes from spending the time, doing the maths and running the scenarios to see if your account will survive the crash if you stick to your plan. This will not only indicate if your brilliant new plan is in fact brilliant or not, but will also help you have the faith in it required to stick to it.

And that's it really. If you come up with something that suits your personality, aka you are comfortable with. Then all that is left to do is for you to question your sanity as the market rigorously tests your resolve to stick to your plan.

@TraderPetri
5 March 2015