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Trading Lessons

The Four Key Elements To Trading Success

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Written by Timothy Sykes
Updated 11/23/2022 6 min read

According to Millionaire Trader Michael Goode

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Michael believes you MUST have these four elements if you want long-term success in trading.

They are:

  • 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.

Edge

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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

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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

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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

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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.

Bottom Line

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.


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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (205) 851-0506 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”