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