Profitable Trading in Unpredictable Markets – 3 Things You CAN Control

You’ve spotted it. The moving averages paint an elegant swoop around the price. The sub-graph technicals are lining up better than the nine planets in our solar system (Oh, it’s eight now, sorry Pluto). It is the perfect buying opportunity and you’re lucky enough to have logged in and happen upon it.  After a few clicks you get confirmation back from your broker that your order is “working.”

Whether or not your order was immediately fillled, the next thing to cross your mind is a running marquee of questions, maybe even doubts:

Should I really buy here after all?
Am I missing something?
The market is actually going against me now!
What if I was wrong?

Of course, maybe you’re an optimistic thinker:

Boom! see? markets going up further already.
I knew this was a great opportunity!

But chances are you’ve already committed some big mistakes and they don’t depend on how beautiful the chart looks.

In fact, there are only three things a trader actually has control over when engaging the market.  All three are critically important to your performance as they inform your mindset about the trade even before clicking “send” on your order.  The ONLY things you have control over as a trader is: 1) when to put your money on the table, 2) how much money to put on the the table, 3) when to take your money off the table.  That’s it.  Obviously, you hope that between 1 and 3 the market moves in your favor – and you might have a great system like the one I will share on this blog site – but the fact of the matter is that you have no control over what the market does.  But you do have total control over these three things.

Don’t stress over everything you have no control over

When you think about it, all the questions, doubts, and applause you tell yourself after you click “send” is just noise.  A ball of stress or delusion that can cloud reality and destroy real profits.  Put your focus on these three points of control because they are really all you have control over anyway.  From here you will have the basic structure to hang the rest of your strategy on. With that, a well-deserved optimism to feel confident rather than anxious, calculated rather than hopeful.  Let’s dig in deeper and really think about what we have control over so we can let go of what we don’t.

1) When to put your money on the table (when to buy).

Something has to make you excited to put some money at risk in the market.  Anything more than “buy and hold” (which isn’t much of a strategy, is it?) and you have a system for identifying trading opportunities.

Whether it’s based on technical, fundamental, or a blended analysis of the two, your strategy tells you when to put your money on the table.  You have complete control over your entry strategies.  You decide what each tick, tiddle, line swerve, or dollar figure means.  Recognize the level of control you have here!  It’s vast and it is important to define for yourself with EXTREME CLARITY when your system tells you to trade.  If your system isn’t profitable, change it!  You have complete control over this point.

When I explore a new trading strategy to use, I usually form an opinion around a hunch or a feeling. There’s only one way to find out if your hunch was right – test it against the market and see if you get a positive or negative result.  Your first point of control is heavily dependant on how well your system indicates when to put your money on the table.  If your system isn’t profitable, don’t get hung up on the fact that your hunch was wrong. If your system doesn’t work, keep working on it or find a new one that does.

If you don’t have a trading strategy, blog posts to come will explore my own trading strategies, so do stay tuned.

2) How much money to put on the table

This could certainly be an entire blog post unto itself. But simply stated: how much money to put on the table depends on how much money you want to lose and should have little to do with how much money you want to make.  Profits are what most tend to think about. Ironic, but paying attention to your risk targets will mean more for your profits than paying attention to your profit targets. For most this means not risking 1-2% of your account value. Make this change and you’re already ahead of most any novice.

Neither profits, nor losses are guaranteed. The profits will take care of themselves, it’s the losses that will kill your account.  After all, more important than making money is not losing it. So I say again, how much money you put on the table depends on how much you can afford to lose

Now, that 1-2% isn’t necessarily the best amount to put on the table.  If you have a really good batting average, say 60-70% you might be able to optimally risk much more.  Generally speaking however, 1-2% is an extremely safe amount to risk. At this level, it will be next to impossible for the moves of the market to create enough losses to take you out of the game – to blow out your account.

It’s about not losing all your money

Imagine your batting average is 50% – a coin flip – and that tails wins 1 and heads looses 1. If you risk 1% of your account per trade, the ONLY way to experience a blow out is to toss heads 100 times in row. The probability of that happening is 1 in 1,267,650,600,228,229,401,496,703,205,376 or 1.2 million trillion trillions! whew, that’s like…a number so big I can’t even really conceptualize what that means!  But here’s the simple math:

2100 = 2 x 2 x 2 x 2 x 2 …up to 100 times = 1,267,650,600,228,229,401,496,703,205,376

As tempted as I am to explain how that math describes the probability of an account blowout, you probably won’t care (if you do, comment below, and I’ll write a blog post on that math.  Go nerds!)

Suffice it to say that you won’t live long enough, or trade enough to ever blow out your account under these circumstances

Now, let’s say you risk 10% of your account per trade.  Now to bust your account what you would need is 10 tails in a row (10 losses in a row).  The probability of that happening is much higher! 1 in 1024!

210 = 1,024

Increase your risk per trade by a factor of 10 and you raise your risk of an account blowout to a level that any trader could easily hit in lifetime, let alone in a month or a year.  Don’t let this be you.  This is your second point of control as a trader.  Control how much money you are putting on the table, or your losses will control you.

Unless you have had your trades statistically analyzed for positive expectancy and blowout risk, you should risk 2% or less of your account in any one trade.

3) When to take your money off the table (When to Sell)

Everyone needs to know (before they put a trade on), when to take their money off the table – when to close a trade.  At the risk of sounding repetitive, this too could also be a blog post or…like…five.  Naturally, much like the first point of control, your trading system will ideally inform you exactly when to close a profitable trade

How do I close a losing trade?

If your trade is a losing one, when to get out is very clear.  Why? because you already determined how much your maximum risk per trade was going to be as your second point of control.  So in a sense because you’ve already figured out your maximum risk per trade, you already know when to take the money off the table if your trade is a loser.

How do I close a winning trade

As for a profitable trade?  Most traders have no trouble imagining how far the market will run with their trade, generating tons of profits for him or her.  Yet, if you’ve ever been there, you know how hard it actually is to close a really profitable trade!  Those old doubts creep in again.

If I take this trade off now I could miss even more profits when the market goes higher!
How will I get back in if I leave this trade?
This stock has been so good to me, I’m not going to let it go now…

If your system doesn’t clearly tell you when to get out, you will invariably watch a very profitable trade dwindle down to your entry price, or worse lower.  If this happens to you regularly, your system so money comes off the table while there is still a profit to speak of.  This is the third point of control every trader has – own it.

Trade your system, not your emotions

If you’re a novice at trading, the psychological pressure to take small profits and let large losers go will be intense.  This is because closing a trade for a profit, however small feels good!  You put your money at risk, your adrenaline pumped and you took your money off the fire for a win! (even if it’s only pennies).  If you have a losing trade it’s hard to close it because, how could you have been wrong when you put the trade on? It HAS to go back up.  After all, it’s not really a loss until you close the trade, right?

Optimism is for opening trades, realism is for closing them.

When you create a trading strategy, please…please…please have EXTREME CLARITY about when you should close the trade whether it’s profitable or not.

Remember: If you never close a profitable trade, you’ll never be profitable.

Your 3 points of control

And that’s it!  Those are the three and only three things you have control over when you trade.  When to enter, when to exit, and how much you want to risk.

Yes, it is true you could say determining a profit target is a fourth point of control. However, because you can’t make the market hit your profit target, you don’t have any control there. A profit target is not a horrible thing to consider, but it is not a point of control. This is why I focus on risk more than profit.  I do not know if the market will hit my profit target, nor if it will hit my maximum loss.  I DO know that eventually the market WILL either provide an opportunity to close for a profit or hit my maximum loss.  As long as the maximum loss hasn’t been hit, why not profits run as far as they want to go?

It is extremely freeing to acknowledge the variables you have control over and those which you do not.  By knowing the difference, your trading system will manage what you have no control over by tenaciously controlling what you have total control over.  Control these three points and prosper.

NEXT: Optimal Trade Size: How your batting average and gain:loss ratios determine the maximum you can safely risk in a trade.

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