How To Be A Successful Trader - Rule 2

On February 28th 2009 I talked about the 7 rules of successful trading and today I will be taking about our second rule of successful trading.

Rule 2: Let Winners Run

When trading it is impossible to tell when a trend is at the start, medium or end, and therefore it is impossible to predict when a trend is likely to end. Trends can last for days, for weeks or to even for months. The reason for the trend is irrelevant and we should follow the trend until it ends, everything else is irrelevant.

The only way to make money consistently is to make sure that your winning trades yield more profit than your losing trades. If this is the case, you will make money overall. The only way to make sure that your winning trades make high levels of profit is to let them run so that you can make the maximum amount of profit for each of these trades. The idea is to let these trades run as long as possible and to only exit them when the trend reverses.

Generally in trading, you should expect that 6 out of 10 trades will be losers, and expect anything from 3-4 winners in every 10 trades. If you have a higher win rate that this, you would be extremely lucky. Whatever your case is, the profit from the winning trades has to be higher than the losses from the losing trades.

The problem is that no everyone lets a winning trade run, and people often sell when they predict that the trade has hit its peak level. Remember you should not make these judgement calls yourself, you should follow the trend and ignore all other factors. Accept that you will be losing at least 6 from 10 trades, and just think about making sizeable profits from the winning trades.

If you can do this all correctly, you are trend following, and you will make money over the long term. The logic is very simple. You identify a trade and follow this trade and trend, and you simply ride out the trend. If the market does reverse, you can exit the trade via your stop loss. If the trade continues to trend in your favour, ride it out and bank some sizeable profits. If you can constantly follow this way of thinking, you will have a huge advantage over other traders, and over the long term you will make a profitable income.

It is important to remember that when trend following, you will have a win that is much bigger than the other winners and this is because you rode out the trend. If you do not follow this concept and bank profits before the trend has ended, you will never make money from trend following and you will not be a successful trader. Just remember one winner can cover lots of losing trades, and it is important to make sure that you extract the maximum profit from winning trades.

The next rule to successful trading will be published soon.

Good luck with your trading

Kind Regards,

Robert Stewart