We have probably all heard about the 90/90/90 rule in trading: 90% of traders lose 90% of their trading capital within the first 90 days. But what makes trading that difficult and why do only so few traders succeed? And are the ways how we could potentially empower traders to break the cycle and achieve better results?
Guiding hundreds of traders through their first years in the markets, I have come to learn that there are certain principles and practices that could indeed help traders on their way. In this article, I am going through the seven most important principles that I believe can make a huge difference in a trader´s journey and potentially increase the odds of breaking the negative cycle.
The points in this article are in no particular order.
#1 Cultivate Good Practices
When it comes to the evaluation of one’s trading, we typically differentiate between the process-oriented and the performance-oriented mindset.
Traders with a performance-oriented mindset judge their trading alone by the outcome of a trade and by the monetary return of their trading. A trade that made money is equated with a good trade and every loss is seen as a bad trade. In trading, however, we know that you can do everything right and still end up with a losing trade because trading is a game of chance and short-term results are unpredictable.
The process-oriented mindset, on the other hand, evaluates how trading decisions are made. A good trade is, therefore, seen as a trade where the trader followed all their trading rules, regardless of the outcome. The process-oriented mindset aims at improving the decision-making process and traders apply discipline and patience to executing their trades. The goal is to improve how well traders can follow their trading rules.
A process-oriented mindset is, over the long term, a great enabler of trading success because it forces traders to detach themselves from pure performance-based thinking and, instead, puts great emphasis on developing good practices and positive trading habits.
#2 Avoid System-Hopping
Traders who are system hopping are constantly changing their trading strategy and are fiddling around with their trading rules. Such an approach leads to inconsistencies and introduces a lot of noise into a trading approach.
It does take time to learn and master a trading strategy and especially in the beginning, the results won’t be great. Traders are then easily tempted to give up on their existing trading strategy and look for a new trading strategy, promising better results.
However, every time a trader changes to a new trading strategy, all the previous learning progress is erased, and the trader must start from scratch and relearn the new trading strategy premise and rules.
It can indeed be frustrating to keep losing money in the beginning but instead of changing to a new trading strategy when the first losing streak hits, the trader should learn to push through, identify the causes of the losses and look for ways to leverage the strengths of the trading strategy.
Look for commonalities among the losses so that you can either avoid certain underperforming circumstances or find ways how to adjust your trading to find better opportunities. At the same time, it is important to understand that losses are nothing to be avoided and losses are a normal part of trading – something we will explore later in this article (see point #6). Just make sure that you operate within the process-oriented mindset and carefully analyze how well you have executed your trades, instead of just looking at the outcome of a trade.
#3 Day vs Swing Trader?
There is a fine line between system hopping and being curious during your first years as a trader. To realize your true potential as a trader, you have to find the right trading approach that fits your overall way of thinking and matches your personality traits.
Typically, we differentiate between the two broad trading approaches of day trading and swing trading. Day traders operate on lower timeframes and execute multiple trades in a day, usually not holding trades for more than a few hours. Swing traders have a much longer trade horizon, realize fewer trades, and hold trades for a much longer time. Each trading approach requires a very different skill set and it is important for a trader to find the optimal fit for themselves.
In the early days, I would, therefore, recommend altering between swing trading and day trading to get a feel of the different trading approaches and evaluate which is the right choice for you. And to make sure you are not just system-hopping because of the finding process, I recommend giving each trading approach at least a few months. Try day trading for 3-5 months and then switch to swing trading for the same amount of time. You should then quickly get an idea of what the right approach for you is and find out where you feel better.
#4 Develop Risk Management
Losing is a normal part of trading and even the best traders will regularly experience losing trades. But there is a big difference in how professional traders and amateur traders realize losses.
Professional traders have strict risk management and position sizing rules that allow them to control and minimize losses. You will often read about the 1% position size rule which states that a loss should not exceed 1% of your total trading account. For each trade, the trader measures the distance to the stop loss (the price level at which point your trade idea is proven wrong) and then you calculate how many lots/contracts you must buy so that a potential loss does not exceed 1% of your trading capital.
Most amateur traders, on the other hand, often realize much larger losses and have no consistency in their position sizing. Because of our work with the Edgewonk.com trading journal I have seen that many traders have significant fluctuations in their losses, and it is not uncommon to see traders lose much more than just 1% per trade.
Inconsistencies in position sizing create a lot of noise and it also puts a lot of pressure on the trader because large losses are much harder to handle emotionally. Large losses, therefore, often lead to bad trading decisions and even more losses.
This is why traders must learn how to correctly size their trades so that losses have the same size and do not exceed their risk limit. A conservative position sizing strategy can reduce emotional pressure significantly.
#5 Off-The Charts Work: Backtest & Journal
Many traders believe that to become a better trader you just have to trade more. And although this might be true partially, there are other ways how you can potentially speed up your learning curve.
The best way to improve pattern recognition is through backtesting. Through backtesting, a trader will be exposed to many more trading opportunities in a short amount of time. Whereas you might only get a few trading opportunities each week, by backtesting historical data, you can easily see dozens of potential trade scenarios within a day. And although backtesting has its limitations, it is still a great way to speed up your learning.
At the same time, keeping a trading journal is another great way to use the time you spent trading effectively. In a trading journal, you record your past trades, and you can analyze your trades to find patterns in your trading. A trading journal can show you when and why you lost money so that you can improve your approach and processes. And a trading journal also shows you what is already going well so that you can do more of that and further improve your edge.
#6 Realistic Winrate
A failure to take losses correctly is among the main struggles traders face. And an inability to deal with losses usually leads to even more trading mistakes, therefore. After a loss amateur trades get emotional easily and engage in damaging trading practices such as revenge trading, over-trading or they start risking too much on their next trades. All of which result in more and larger losses, leading the way into a vicious cycle.
However, taking losses optimally and staying unfazed during losing streaks is so crucial for long-term success. Even the best traders will frequently take losses and when you read traders´ biographies or interviews with the best traders you will see that even the best of the best typically “only” realize winrates between 45% and 65% at the most. Trading without losses is not possible!
Amateur trades view losses as something to be avoided at all costs. Instead, traders should learn to take regular-sized losses while making sure that their trading decisions have followed the trading rules. Also, working on optimizing winning trades while keeping losses small may provide a much larger edge.
#7 Play the Long Game
Professionals play the long game while amateurs believe that it is possible to get rich quickly with trading. Such an assumption is dangerous because it results in bad trading practices to achieve those unrealistic goals.
In the end, trading is just like any other profession, and it takes time to build a solid foundation and it takes even more time to grow a trading account “the right way” without taking on too much risk.
Amateurs underestimate the power of compound returns over the long term. Many struggling traders try to realize double-digit performance results month after month and to do that, they take extraordinary amounts of risk.
When you catch yourself the next time doing arbitrary calculations in your spreadsheet to see how fast you can become a millionaire by doubling your trading account year after year (or maybe even month after month), it is important to realize that the more pressure you put on yourself, the more likely it is that the pressure will break you and your mental game.
Conclusion
To conclude, we can summarize that trading is not just about numbers and strategies; it's fundamentally about discipline, consistency, risk management, and the right mindset. The pitfalls are many, but by adhering to the principles outlined in this article, you place yourself on a path of informed decision-making and long-term, sustainable growth.
Remember, every successful trader once started as a beginner. The key is to cultivate good practices, stay committed to your strategy, and always aim for continuous learning. As you navigate the unpredictable waters of the markets, let these seven principles be your guiding compass.
