There are two main concepts one needs to understand and maybe learn the hard way, before becoming consistently profitable:
- Different setups work in different markets.
The same setup that can deliver outsized profits on one trading environment might lose you money in a different market. For example, buying strong stocks in hot industries in anticipation of a breakout works great during market uptrends, but it is a system with no edge at best during range-bound markets. Buying breakouts after a few days of a general market rally in a range-bound environment is not a profitable approach. Swing trading is a lot more challenging during corrective markets when correlations between stocks are very highs, volatility is ginormous and the market changes its direction frequently. Intra-day trading is a lot more profitable during fast corrective markets than during low-volatility steady market uptrends, when swing and position trading provide more lucrative alternatives.
Edges come and go because markets are constantly changing – sometimes, in a predictable, cyclical manner; other times, in a completely new and unexpected way. The path to survive and grow is to constantly experiment with new ways to make money and protect capital.
2. The concept of holding power.
Many novice market participants trade with too much size and get easily scared out of sound positions.
Holding power comes from two things:
a) A good entry – this means picking the right setup for the current market. A good entry helps to keep our potential loss small, while it provides the opportunity to make multiples of our initial risk. Risking a dollar to potentially make three dollars per share.
b) The right position size – I risk between 0.5% and 1% of my capital depending on the market.
Leverage and trading too big have ruined not one or two accounts. I became much better and consistently profitable trader once I cut my position size to reflect my current trading capital and the current market environment. Not all markets provide equal opportunities for profit. There are times to be aggressive. There are times to protect capital and confidence.