What makes a good trade?

Petri RedelinghuysTraderPetri

Over the past few weeks the market has been rather tough, and trading strategies and plans were thoroughly tested. So naturally this whole ‘discipline’ thing has been at the forefront of my mind for some time now. Few things in life are as difficult as sticking to your own rules, hence all this blabbering about sticking to your plan and so on.

To keep this interesting and counter intuitive, I’ll start with all the things that a good trade is not.

  • A trade which made a lot of money.
  • A trade that had a great risk: reward ratio.
  • A perfectly timed entry, at the bottom, just before the bounce.
  • A trade which everyone told you wouldn’t work, but did, beautifully.
  • A trade in which you captured a huge move in the share price.

Sure, these are all things that are awesome, right? …Wrong. Every single one of them can be put down to blind luck. Even if all of these characteristics and more are present in the same trade, it could still not be a good trade.

So what is a good trade then, if not one that you made money on? Very simply put, a good trade is one that was executed exactly according to how it was planned, regardless of the outcome. By this definition a good trade could be a losing trade as well. As long as the trade was executed in accordance with how it was planned, that is all that is important.

Now I’m not saying that you shouldn’t close your trade because it missed your target price by 1c. I’m saying that if you had a clearly defined plan with clear if/ then rules, and you stuck to that plan, it was a good trade; regardless of whether it was a winning or losing trade.

You see the problem is that most traders act – or trade – randomly. They take trades that are suggested to them, they don’t follow money management rules and they have no clear set of criteria that define an opportunity to them. Yes, the market can and probably will reward these traders a few times for their random behaviour, although over time their inconsistency will cost them dearly.

What is most important when it comes to creating consistency out of chaos is to take just one good trade. Then another. Then another. Then another.

Your homework is to read One good trade by Mike Bellafiore and Trading in the Zone by Mark Douglas (find our review here).

Happy trading.

Trader Petri

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