According to Millionaire Trader Michael Goode
Michael believes you MUST have these four elements if you want long-term success in trading.
- An edge
- A trading system to exploit that edge while minimizing risk
- The mental fortitude to stick to the system
- A way to monitor the system and apply changes to it.
An edge can be defined as a strategy, market observation, or approach that gives you an advantage, AKA a better likelihood of making a profit. In the world of gambling, casinos hold an edge over their customers. Statistically, they know they’ll come out on top if you play a game over an extended time.
But aren’t the markets random?
They are. But anyone who has been around trading enough knows that certain patterns repeat themselves.
Michael will backtest his ideas to see if they have a statistical edge. He’ll use a program to gather data and place his inputs.
For example, one of his ideas is shorting 1-day stock gappers. Instead of relying on memory, he found a series of data that consisted of 1-day gappers to see how they performed and if the strategy made sense.
A Trading System To Exploit That Edge While Minimizing Risk
Just finding a winning idea alone isn’t enough. Going back to Michael’s example, shorting 1-day stock gappers, you still need a system to trade it.
Things that must be considered include:
- Trade execution
- Risk management
- A profit taking strategy
For example, after backtesting it, you discovered a play that consistently works at 7 AM ET. You get super excited and start thinking about everything you’ll buy from your newfound wealth. You turn on your broker platform the next day, ready to start printing money.
But realize this amazing backtested strategy has no liquidity at 7 AM ET. In other words, you can’t execute because the spreads are too wide. Often, a strategy will look incredible when it’s back-tested but will not be viable in a real market setting.
Risk management is the key to long-term trading success. For example, let’s say you discovered a strategy that works ALL THE TIME. Something like fading stocks after they’ve experienced a 1-day 100% move. The stock is likely to sell off but might surge another 100-200% before it does. So even though we know it’s a short, we might not have the stomach or the capital to absorb the spike higher.
That’s why without a risk management plan, your idea is incomplete. It’s also the reason why so many traders get destroyed from short-selling. We all know that the news is weak, and the stock is likely a zero, but we don’t know how high or how long it will stay up before it comes crashing down.
And if stubbornness doesn’t get you…greed will if you don’t have a plan. It’s easy to get excited when things go your way, but they can turn on you quickly. That’s why you MUST have a profit-taking strategy with your system.
The Mental Fortitude to Stick to the System
I often tell my students that it’s okay to trade scared. For me, fear allows me to stay alert and focus on risk.
But that’s not what Michael is referring to when discussing mental fortitude.
It’s more like the Steph Curry mentality. Shooters are gonna shoot. For example, if Steph Curry is 1/7 from the 3-point line in the first half of a basketball game, he won’t shell up and abandon his shooting. He knows that if he keeps shooting, he’ll eventually find his rhythm.
No trading strategy works all of the time. Traders who rely on a statistical edge know this. But they must stick to their system even if they are experiencing drawdowns because, like the casino, they know over time, they will win.
A Way to Monitor The System and Apply Changes to It
In trading, trends come and go. And then they reappear again. Imagine you developed a strategy trading SPACs in 2020, backtested it, and showed a quantifiable edge. Chances are that strategy is worthless in today’s market.
Market conditions changing is completely different than having the mental fortitude to stick with your system. That’s why you need to monitor your system to the changing markets. In addition, make it easy for yourself to make adjustments and not be scared to abandon it if it no longer works.
Constantly reviewing your trades is the best way to stay on top. Journaling is essential if you want to be a systematic trader like Michael.
A lot of traders rely on memory alone. Michael Goode likes to collect data and backtest ideas. It gives him the confidence to execute and stick to his system. If you’ve never tried this approach, you should, even if you decide it’s not for you. It will open your mind to the big picture and give you greater clarity on your overall trading.