Monday, October 25, 2010

Choosing to be profitable

 - This week we have a special guest post by Scott Cisco aka @TraderCisco:

Often when trying to train my son I talk to him about how much of life is about making choices, and that with the choices we make there are consequences. We all understand that as we go through life we make choices that we live with. For my son, the choices might be as simple as whether to have one sweet or the other after dinner but not both.

We have to deal with the same challenges too. Where to vacation or holiday, what type of automobile to purchase? When we make a decision, we have to live with it.

I have been thinking lately though whether or not we have to choose to be either profitable or a trader. We can be profitable without being a trader, (e.g. savings account or an annuity) and we know that it is very easy be a trader and NOT be profitable. I think we have to make a conscience effort to be a profitable trader, and I think the key is very simple:

You must decide to be profitable first.

Recently, I received a disclosure from a forex broker ago and the percentage of traders who were NOT profitable was very high. Only 33% of traders were profitable in a given quarter and that was the HIGHEST percentage of any quarter that they disclosed for a full 12 month period.

I think many traders lose their profitable edge by being overly active. I have visited with many traders (and I have been guilty of this more times then I care to admit) who feel the need to be actively involved in the market at all times. If they are looking at their charts they have this belief that to be a “trader” they must be an active participant. If they have a position open, they feel compelled to be making active decisions about that position at all times. A trader stares at the chart waiting to make any needed adjustment to the position at a moment’s notice. However, this “trader” mentality is the bane of many a trader. You lose sight as to why you really are trading. We trade to be profitable, not to trade.

Jesse Livermore said: “After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting.”

It is time to make the decision to be profitable, and Jesse Livermore realized that allowing a position to work or not getting into a position when the market has not established a clear direction is critical to being profitable. He didn’t want to “think” himself out of a good position. Do you want to be profitable or a trader? I have chosen profitability, and with that decision, I can now use trading to accomplish that goal.

I’m sure some feel that this is just a word game, or nonsense, but I do not believe that to be the case. It takes a conscience effort to allow your positions to work, or to stay away when the market is not conducive to profitable trading.

So you have a choice to make: What do I want to be profitable, or a trader?

I want to be profitable.

Now what? Well the answer to being profitable involves research and study. You have to go back and look at what you have done in the past to make a good determination as to what are your weaknesses. Study and figure out what is keeping you from being profitable. Are you taking profits too soon? Is it possible that you are allowing greed to keep you in positions too long? It may mean that you need to hone your skills as to what is an appropriate target to trade to. I’ve seen many traders who spend hours and hours studying new setups for entries, but no time at all on learning how or when to close a trade. Do you trade with a negative ratio, meaning do you have a stop that is larger than your take profit? I have never met a profitable trader who trades that style. If you are trading with a 1 to 1 ratio you have to have a 50% success rate to be solvent. ½ to 1 and you have to have a 66% success rate for solvency. I personally want a 2 to 1 return, because I only have to be 33% to be solvent, and my setups are better than that.

As I tell my son, the choice is yours. What do you want to be? Never stop working on improving your profitability, by doing so you will find that your trading is much more enjoyable and fulfilling.

Scott Cisco aka @TraderCisco is one of the owners of and regularly interviews successful traders who share what has helped them succeed as profitable traders.

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