Learning from Consistently Profitable Traders

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Learning from Consistently Profitable Traders

Novice traders usually come into Futures trading thinking that they need some elaborate trading system or automated software to tell them when to buy or sell to become a successful trader. Soon after that, they feel like there is a hidden secret that only a select group of traders know about. This usually leads to many hours of trying to find the Holy Grail trading strategy. I am often asked about newsletters and advisory services that offer trading recommendations. My reply is "you do not need them and should avoid them." One problem with using these services is the false sense of trading success you may get. Imagine you find that one service with good advice and you actually make some money (we can all dream, right?). Then one day you find out the company went out-of-business, or they raised their subscription fee to some ridiculous amount. Where does this leave you, the trader, if you have not learned to trade and think for yourself?

Recently, I read a book titled, "One Good Trade," by Mike Bellafiore. This book takes a look inside the highly competitive world of Proprietary Trading. I found some very useful information in this book about the mindset of a particular type of trader. Mr. Bellafiore referred to these traders as Consistently Profitable Traders (CPTs). The list below does not come from the book, but I can assure you that to be a CPT, you will need to understand them.


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Having a strategy is important, don't get me wrong. The problem is when a trader tries to find a perfect strategy and spends a lifetime in search of this elusive dream. As I mentioned earlier, a consistently profitable trader can take a mediocre strategy and make money with it. How do they do this? Let's review the list below and see how these traders view the market and then you can see if you are on the right track to success.

• A CPT will find a strategy that offers them a higher than average probability of success. In the markets, we call this "finding your edge," meaning having a slight advantage over your opponents.
• Once this edge is developed, the CPT will consistently use this for every trade and not deviate from it. Many novice traders fall into the trap of making an emotional trade that is not part of their trading plan and make money the first time. This creates a sense of false security for the trader, who then assumes the next time it will work, too. Obviously, we know how that next trade works out and the trader then realizes it was luck that made the previous emotional trade. There is a saying in the markets that goes like this, "You can break the rules once in awhile and get away with it, but eventually the rules will break you for not obeying them."
• A CPT will never enter into a trade unless they know exactly how they will manage the trade from the entry price, protective stop, breakeven, exit strategy, etc. Managing your trade this way will take some of the emotion out of your trading. This allows you to become more logical with your trading.
• Once in a profitable trade a CPT will never let it turn into a losing trade. Your plan should say at what point you bring your original protective stop to breakeven once price moves favorably for you. Allow the market to move far enough in your favor so as not to get stopped out prematurely. Also, allow the trade to cover your cost of commissions by adding one price tick above your breakeven price.
• A CPT will follow their trading plan and never use emotions such as hoping, praying and or wishing. Once the trade shows signs of failure, the CPT will allow the market to come back to their protective stop and not just exit because they want to save a few ticks on the loss.
• Risk management is very important to a CPT. They are always thinking in terms of capital preservation and not worried as much about capital appreciation. As traders, they will not risk more than 1 ñ 2% of their available trading capital on any given day trade. On Swing trades, this number may be 3 ñ 5% of their trading capital. Each CPT will have a maximum dollar amount they can lose on any trading day, and they will cease trading immediately when that number is hit.
• CPTs do not try to make it rich on one or two trades. They understand that successful trading is based on a series of good trades to make them profitable, just as they know that one trade will not wipe them out financially. Trading is a probability business and a trader must understand that you will not be right on all your trades, nor will you lose on all of your trades. Once a trader realizes this concept of probabilities, they will find that after each trade, they will move on to the next trade and forget about the last trade, win or lose.
• CPTs are often contrarians. You will find them buying while others are selling on news or emotions. You will also find them selling when the crowd is in herd instinct and chasing a market higher again on emotion or news.
• You will not find a CPT waffling when they have a trade setup. These traders will act immediately upon seeing their setup and follow their trading plan perfectly once in the trade. Waiting too long or for a confirmation after your setup will make you late entering your trade. Too many traders get in long after their setups and they try to use the original size risk. This simply does not allow for market volatility and they are all too often stopped out only to watch the market resume in the direction of their stopped out trade.

Trading and thinking like a consistently profitable trader will allow your trading to improve enormously and the profits will come much easier as you learn to control your risk and let the profits take care of themselves. You can see that these CPTs have a successful strategy, but that is a very small part of how they view this business of trading. This reinforces the significance of having a trading plan and the discipline to follow it. Our plan creates the structure we need to survive in this business. Otherwise, we are just making random, inconsistent trades and the odds of that leading to a long trading career are very low.

Our trading plan can give us the needed courage to face the markets each day without having to fear the outcome because we have a plan for each step of the trade and the discipline to follow it.

"Courage is knowing what not to fear." Plato

Plan it and Trade it,

- Don Dawson

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