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If you’ve moved out of the Exploration Phase and into the Gravitation Phase then you’ve successfully continued to move forward and not in place, and that’s huge. You may very well be ready to advance into the Streamline Phase now. But let’s first make sure that’s really the case before we go further. 

Do you know the strategies that appeal to you, that have stuck around and have shown promise? Do these strategies seem to fit your personality and lifestyle? In other words, do they make sense to you and are they enjoyable to trade (or at least not unenjoyable)? Do you have the availability to trade these strategies? Were their back tested results positive and, if so, were they positive enough? In other words, did you test the strategies far enough back in time and make enough money over that period to justify trading them in simulation and subsequently the live markets? Did your back testing give you a clear idea of what types of market environments caused your strategies to thrive or struggle?

And as you journaled about and reviewed on a daily or weekly basis each and every trade that you may have simulated or traded live, did you discover certain trades that you typically executed with discipline and consistency and which ended up yielding mostly positive results, as well as those that you didn’t seem to execute as well and which therefore didn’t perform as positively? This is valuable information for determining what to keep and what to put aside or throw away.

If you can identify the trades that have stuck around and shown promise then list them out in your journal and commit to focusing at least 80% of your time on them every week. All other trades and concepts, unless you decide to completely scrap them, should only get 20% of your time every week.

This is how you actually get yourself into the Streamline Phase: you must narrow down your efforts to the right things and commit to eliminating or at least to putting aside those things that you don’t like to trade, have been difficult to trade or to understand, or have actually been costing you money. Anything else that has shown a smaller amount of promise or with which you have maintained some degree of interest must be given much less of your time. This is your best chance at reaching consistent profitability sooner than later.

On top of this you have to promise yourself you won’t get distracted by new strategies that look like sure things or all of those promotional emails promising huge returns. Write them down in your journal and come back to them later if you want, but this is a sure way to fall right back onto that hamster wheel. And you want to keep yourself off it at all costs. 

So, again, this is where the allocation of your time becomes even more structured. If you’ve got 20 hours per week to commit to learning how to trade, spend at least 16 hours (80%) on your best strategies and only up to 4 hours (20%) on anything else.

Structuring your time leads to structuring your overall approach and this is very important for becoming the best trader you can be. Once you gain enough knowledge and experience have the bravery and confidence to let yourself be exactly who you are by knowing what you’re good at and what you’re not, and then develop clear plans of action based on these things and execute them in a disciplined way, the markets will happily start offering up those profits. You’re now getting closer to giving the markets what they demand.

Once your time is structured and you’re spending the appropriate amount of time on the right things, putting aside or eliminating the other things and not letting them or anything new distract you, you need to focus on getting good at the right things. Once you’re good at them, you have to continue to focus on getting really good at them. Once you’re really good at them, you have to focus on getting really, really good at them. Once you’re really, really good at them, you have to focus on getting really, really, really good at them. Sensing a pattern here? 

Focus first on getting good at your strategies and then getting even better at them. This is how you make consistent money in the markets. You turn your favored strategies into your strengths and then you constantly work on getting even better at what you’re already good at. This is called the Muscle Phase and you’ll know when you’re in it because you’ll be a much more confident trader with a much clearer idea of what YOU do in the markets to make money. 

Getting better at one or two strategies within specific trading styles will also help you understand other concepts and strategies in other styles that may have eluded you. Have faith in that. So if you’ve had success with trading stocks based on the charts, get better by looking at charts every day and testing your ideas. Within each trading style, like swing trading and options trading for instance, focus on just one or two strategies or concepts at first to make it simple. When you do this you gain more knowledge and experience in the craft of trading, and that strategy in the index futures, for instance, that you’ve put aside because it was hard to grasp may start to actually look a little clearer to you.

Did I narrow my vision, streamline my efforts and get better at my favored strategies?

Eventually, yes. The success I experienced with automated systems in volatility products allowed me to start focusing solely on what became my core approach: automated volatility systems, swing and momentum trading in stocks and market-neutral strategies in options. And my success accelerated from there.

Streamlining my efforts allowed me to get better and better at understanding why my automated volatility systems were successful and gave me the faith I needed to keep running them and increasing my risk capital. I continued studying, testing and trading the short VXX system but also began studying other systems in volatility products, like going long volatility when I wasn’t short. So I got better and better at it until I developed even more profitable automated systems.

This kept me in the markets and allowed me to narrow my vision on my other favored strategies (swing and momentum trading in stocks and market-neutral strategies in options), eventually become profitable at them and gradually become better and better at them and even more profitable. This is how I developed my core approach, which is hugely important for profitability. And the process of getting better also leads to understanding how to become more adaptable with your approach as market environments change, which is hugely important for long-term success as a trader.

I don’t want to make it sound like it’s easy, though. When you get stuck on the hamster wheel like I did, and like so many aspiring traders do, it’s hard to get yourself moving forward again. I’ve mentored traders who were firmly stuck on the hamster wheel and I remember thinking they were very close to getting off and getting themselves moving forward again but just needed a nudge.

One of the individuals I briefly mentored gave me a list of ten different trades that he had back tested, simulated and traded, as well as the results of his efforts. A few of them that he liked had been showing some promise but he had reached out to me for mentoring because in spite of some good results he needed someone to give him guidance on how to proceed. The poor guy was not only getting pulled around in all different directions by so many different trading styles but also all the different strategies within each style. This is what can make it so difficult to emerge from the Exploration Phase unless you really focus your efforts. He was obviously leaning toward spread trading in options like me but he had five or six different strategies within that trading style that he simply couldn’t choose from. 

I honed in on that trading style and told him it was best that he continued to focus on it. I told him to choose a few among them that he liked the most and had shown the most promise (there were definitely a few of these on his list, like I said) and to keep working hard on these, but I could tell after a little time working with him that what he really wanted – and this had been common with many aspiring traders seeking mentoring – was for me to give him something that worked all the time because he was tired of running into the same walls with the same strategies and hopping around among them. This is a prime example of the hamster wheel and can be extremely difficult to free yourself from it. He just didn’t want to stick with one strategy or approach and get better through adversity. But that’s the only way he was going to get better.

Traders who are stuck on the hamster wheel don’t want to hear that they need to keep working on the things they’ve already worked on because of the pain they’ve experienced and sense of futility they’ve felt. They may believe those strategies just don’t work or they just don’t want to feel the pain of another loss so they avoid them and look for new and promising things to trade. At this point they become desperate for someone to give them something, anything, that just works all the time.

But this is where it becomes so important to really narrow your vision and focus on getting better at the strategies that have stuck around and have shown promise. It forces you to really understand the strategies, which leads you to understand exactly why they don’t always work. And it’s just as important to understand when and exactly why they do work. You have to understand them inside and out by studying them, back testing them, simulating them and trading them live.  This is how you start to understand them on a deeper level and to make them your own. And this is also how you start to understand them in relation to changing market environments, which is hugely important for developing the ability to adapt and stay flexible and become a consistently profitable trader on a long-term basis.

You are now firmly on your way to the Pro Phase. The reason you’re on your way is because you know who you are in the markets and how to make money from that. It means you’ve got the tools and knowledge to be a consistently profitable trader. Now you have to go out there and make that money, and get better and better at what you’re good at. You need to go profit from your uniqueness.

In order to profit from your unique personality you have to constantly remind yourself what you do. If you’re an intraday and swing trader of stocks you need to remind yourself of this every day, especially when new and interesting trading styles and strategies are always being talked about by other traders in chat rooms or being emailed to you on a daily basis. You have to resist distractions and dance with who brung you, as they say.

You see, once you’ve reached this point the last thing you want to do is get distracted and stray from your core approach. The last thing you want to do when you get to this point is to lose focus on what got you here.

Don’t get me wrong; I’m not saying you can’t add other strategies and concepts to your repertoire. As I discussed before, you can still spend some time on things that continue to pique your interest, but make sure you spend more time on your strengths. And if you consider adding new strategies, first make sure they fit into your core approach and lifestyle. 

If trading futures intraday doesn’t fit into your core approach, don’t add it. Stick to your proven disciplines. But if it does fit, work on it, test it and trade it in the live markets when you’ve developed a plan to make money and are willing to be disciplined enough to make money from that plan. And then maintain focus on it as a core strategy.

And as you stay focused on your core strategies, applying the proper amount of discipline to them every time you enter the markets and staying flexible with them through changing environments, you get better and better at what YOU do. This is what consistently profitable trading is all about.

At this point your opportunities in the trading world expand beyond just the prospect of preserving your wealth or building it. You now have the knowledge and skillset that can lead to managing money for others, advising others on their investments and trades, trading prop for firms, starting up your own brand on a web site and selling strategies or offering trading services, coaching and mentoring other traders, etc. Some of these options will take more work and experience, as well as obtaining licensing and registration with regulatory agencies, but they become real possibilities. And you’ve earned the right at this point to consider them seriously. Very few people have the knowledge and skillset you’ve worked hard to build.

But it’s important to realize that, just like developing your core trading approach and strategies, figuring out how you want to proceed from here depends on what fits your personality and lifestyle. Don’t become a money manager or investment advisor just because it sounds prestigious. Do it because it’s where your passion lies in trading. Don’t become a prop trader just because you think it makes you sound like a professional trader. Do it because you want training from professionals, access to high-performing proprietary software and access to more buying power than you can get with a retail firm.

Every day go into the markets and remind yourself who you are in the markets and what you want. Remember the what and the why? You’re getting much, much closer to achieving that now. Good for you. You’ve earned it. So go get it.

What do I do that is unique?

I realized at a certain point that I do three things: automated strategies in volatility, swing trading in stocks and ETFs and market-neutral options trading. I continue to look at other things and consider adding them to my core approach but I’m in no hurry. I’ve already got the approach that makes me consistent money in the markets and allows me to be adaptable and flexible to changing market environments.

This doesn’t necessarily make me unique as far as what I trade, but within my core approach I trade the way I see the markets. This means that although my trading styles are fairly common in the retail trading world, nobody trades my strategies and trade plans exactly the same way I do. Nobody chooses their swing trading candidates exactly the same way I choose them.

I’ve heard the co-founder of a very prominent and successful proprietary trading firm say he can have an intraday trading desk made up of several traders trading the exact same strategy, but each trader will be trading it differently. This is because they’ve each personalized the strategy – made it their own. And that’s why they each make money at the same strategy in spite of trading it differently. They each see the markets in their own way. And this is how you generate profits from your uniqueness.

When I would get distracted by other trading styles as I was still developing my unique approach I would stop and ask myself, “What do I do?” This would always direct me back to my core approach and keep me focused. At this point in my trading career it’s very hard, if not impossible, for me to get distracted because I know exactly who I am and how I make money in the markets. This is how I’ve become a successful trader. The thought of moving away from my approach and doing something that doesn’t fit my personality is just crazy. 

So I’ll continue to dance with who brung me. 

Setting annual goals is very important for consistent growth as a trader. This is where you really start to operate with very clear structure and purpose. It’s what transforms you from a good trader into a great trader, and ultimately into a pro, which is why it’s called the Transformation Phase.

To become a great trader you have to get better at what YOU do, and the best way to do this is to annually revisit exactly what you do and why you do it, and especially how you can get better at it in the upcoming year in order to give the growth process some real structure.

Lay out your goals for the upcoming year in order to get even better at what you do. These goals should not be how much money you want to make. That’s much too general and result-oriented. Your goals should be specific and process-oriented so that your guidelines are practical and clear.

For instance, if you’re an options trader and you were patient with your fills last year then work on getting even more patient. Set guidelines like watching the bid and ask at least five minutes longer than you usually do before entering an order. If you’re a swing trader in stocks and you were disciplined at taking your stop losses and letting your winners run, set a goal to get even more out of your winners and work hard to achieve it. If you’re an intraday trader and have had more success on the long side than the short, work on a way to get better on the short side. Set a goal to learn how to read the tape.

On top of getting better at certain things there are always things we continue to struggle with and need to keep working on. Do you still struggle with following your plan exactly as you designed and tested it? Set a guideline to force yourself to leave your trading desk or actually sit on your hands when you consider taking action that is not in your plan. Are you checking off all of the items on your checklist before choosing a candidate for a trade? If not, set a guideline to not take any action unless all of the criteria on your checklist are met for each candidate.

What about your ability to let the markets guide you? How did the markets change last year and how did that affect your strategies? Were you able to properly assess the market environment for the most part and capitalize on it? If not, were there signs you missed that you should look for in future years?

Again, it’s not a good idea to have such general goals as how much you want to make in the coming year. But you can set goals to gradually scale up the capital allocation in your strategies or particular trades within your strategies that year. For instance, set goals to put more risk in your A+ (best) setups if you’re intraday trading or swing trading stocks and looking for the best risk-to-reward scenarios. These are more concrete, tangible goals and can lead to making more money without taking on unnecessarily high risk.

This is also a good way to set aside time to go back to those strategies that you never completely gave up on. You can set goals to spend more time on adding new strategies to your core approach as long as you vet them properly so that they fit into who YOU are as a trader. For instance, if futures trading never clicked for you but you’ve always maintained an interest, spend some time each week on it in order to determine if there is a time frame in futures with which you’re comfortable and whether it can be comfortably added to your core approach. But don’t add it unless it fits right in to your approach and lifestyle.

You have to remember that getting better as a trader is a process, and it’s a process that takes patience and perseverance. Without goal-setting you’ll never get as good as you want to be. And that can be the difference between a trader who just does okay year over year and a trader who builds up enough capital over time to retire and become financially independent.

When you work hard through the year to meet your goals, you get better and better at what you do. And when you actually achieve your goals, look out! Just let the markets try to force you out now! Always strive to get better and set annual goals with this in mind. 

Have faith that if you focus on the process and not so much on the result, the money will come.

Did I set goals and meet them consistently?

At first my goals were to make more money, but this never gave me specific things to work on. It just made me feel bad when I didn’t make more money.

So my goals changed to things like being more patient when working to get my option spreads filled, test new indicators for my volatility systems, test different automated strategies in trending stocks and build trade plans that more closely fit my lifestyle.

For 2020, I committed myself to getting better at reading my environment and choosing the right strategies and trade plans at the right time. I also committed myself to getting better – more confident – at sizing up when I see my best swing-trade setups.

Getting better at what YOU do in the markets should be a process-oriented endeavor. Again, have faith that if you focus on the process the results will come.

One of the great things about learning how to trade is you learn a lot about yourself. It forces you to be honest with yourself. This is because the markets will FORCE you to be honest with yourself or they will FORCE you out of the game.

Is it easy to be honest with yourself? Of course not. That’s also what makes trading a very difficult profession to learn. But there’s just no way you’re going to have a long career of consistently profitable trading without knowing who you are and what you’re good at, and of course what you’re NOT good at.

If you think you’re a stock trader who has a special gift for picking the direction of the FAANG stocks, the markets will tell you if you’re not. If you think you’re an intraday trader of stocks or futures and will make millions of dollars at it, the markets will tell you if you’re not.

But you have to listen. That’s the key. You have to be willing to listen and to accept the markets’ conclusions because the markets know if you’re being honest with yourself or not. If you’re stubborn and ignore reality by insisting that you’re right and the markets are wrong you’re going to get forced out of the game.

The good news is that the markets will also tell you what you actually are good at. If you’re adept at reading the charts and seeing probable price moves in certain chart setups, the markets will let you know. They might push back a little bit in the beginning to make sure you earn it, but a path of least resistance will start to form if you’re showing a willingness to listen and be disciplined when executing your trade plan.

And the more disciplined and humble a trader you are, the more the markets will let down their guard and let you reap the many benefits.

You see, markets change. That’s just a fact. That’s why there’s no Golden Goose or Holy Grail strategy and that’s why it’s so important to be adaptable and flexible. But in order to notice when the markets are changing or when they’ve already changed, and then to understand what you should or shouldn’t do in response to that, you have to know how to pay attention and then to swallow your pride and care more about making money (or not losing a lot of money) than being right.

When the markets went straight up in 2013 I remember a lot of traders complaining about losing money because they kept talking about how overbought stocks were and how they were going to fall apart any minute. The thing is, the markets weren’t showing any signs of that. They were just going up. So what was the edge? Well, it certainly wasn’t in complaining about it. The edge was going long the markets in whatever way worked best for each trader until the markets stopped going up. 

2014 was the year of the V-shaped bounce. If you go back and look at a daily chart of the S&P 500 you’ll see what I mean. The market would sell off and then literally bounce like a rubber ball several market days later, leaving the shape of a V in the print. It did this enough throughout the year that it threw many traders off because they weren’t adaptable and flexible. They would stick to their guns and believe their opinions of the markets were more powerful than the actual markets. Big mistake. That is never an edge in the markets. What was the edge in 2014? If you would have been paying attention, noticed this pattern emerge and then started trading strategies that either took advantage of this kind of behavior or weren’t phased by it, you would have been fine. And you would have traded this approach until it stopped working. That’s just trading.

The first seven to eight months of 2015 were the greatest market environment for positive Theta, market-neutral options trading I’ve ever seen. It didn’t matter what strategy you traded in that particular discipline during that time, it was abundantly clear they all had edge. But then in August of 2015 the market fell apart and everything changed. Those options strategies were suddenly no longer viable and you had to adapt or you’d lose all the money you’d made that year. Good thing I was trading long volatility by that time. That’s what suddenly took over the edge and what ultimately saved me that year.

If you were trading at the beginning of 2016 you’ll remember that it felt like the bottom dropped out. This kind of market environment is tough to trade because at any moment that big bounce could happen and it’s very painful if you find yourself too short the market. But the prospect of that bounce can be a bigtime opportunity. If you believe that unlike in 2007-2008 there’s no real structural or fundamental economic problems looming then it can be a good time to start carefully building a position that would benefit from a bounce. Even a “dead cat” bounce, which is really just a pause in a continuing selloff, can be played this way as long as you’re nimble enough to get out once it looks like the selloff is ready to resume. That’s just trading.

Of course, sometimes it’s just better to stay out of the way until there’s a little more clarity. There’s nothing wrong with staying on the sidelines until things become a little clearer for you. But if you would have positioned yourself for that bounce in 2016 you would have ended up benefiting all the way through 2017 because the markets just kept going up for almost two years.

Then in February of 2018 the markets experienced what everyone would later call the “volpocalypse.”  This was a sudden and vicious selloff that saw the VIX explode into the stratosphere. Many market-neutral options traders were taken completely off guard and their positions were annihilated, and the moniker for the event came from the fact that volatility spiked so high so quickly that people who were short volatility got crushed and lost huge amounts of money. One of the inverse exchange-traded volatility products even went out of business. Up until then the short volatility trade had been very popular.

I was lucky that at the time I had put my automated short VXX system back into testing so I wasn’t trading it live (actually, it wouldn’t have mattered because the system would have gotten me out before the actual spike in volatility) but I was trading a market-neutral options strategy at the time that had become my first successful options strategy. That was a butterfly strategy, and like so many other strategies of its kind it’s short Vega, which is the options Greek that measures an option’s sensitivity to implied volatility. Luckily, I got out quickly and wasn’t hurt that badly. But it really woke up a lot of traders to the dangers of sudden market changes. In fact, I started focusing more on long volatility strategies after that event.

Again, as a short-term trader, you had to sit back and wait for clarity. And then you trade what the markets are telling you might have edge until it doesn’t. That’s just trading.

Of course, let’s not forget the huge selloff of February-March 2020 due to the coronavirus pandemic. My automated system in long volatility had a field day but I had to get out of everything else until there was more clarity. Once the markets bounced and seemed to get some footing, I got long the markets and made money on the way back up. You just have to pay attention and stay flexible. That’s what gives you the best chance at long-term success as a trader.

Let the markets guide you. They’ll tell you what to do and what not to do. I can only help you walk through the door. The markets can help you set up and run a prosperous business.

Remember the famous John Maynard Keynes quote: “Markets can remain irrational longer than you can remain solvent.” This is absolutely true. So don’t fight the tape.

Did I let the markets guide me?

It’s hard to hear what the markets are telling you until you’ve learned enough and traded enough and watched enough price action. But if you take the time to look at what’s happening in the markets and understand how you got there, you might be able even at an early stage in your journey to formulate an idea of what is most probable. This is a good way to start paying attention to the markets and how they change. If you start trading based on your evaluation, you just have to remember to stay flexible if you turn out to be wrong. Always have a “What if?” as part of your plan.

I remember struggling with my trading a few months after I’d learned Technical Analysis and options. This was very early on. I contacted the guys who had provided the course and asked if they would be willing to grant me a follow-up session. They did, and during the session the very sympathetic instructor said he understood and asked me to take a look at a chart of the S&P and tell him what I thought was most probable: did I think the S&P was going to go up, down or sideways? I studied it for a few minutes, thought about how we’d gotten there and what was going on in the financial world and said I thought it was most likely going to go up.

I turned out to be right but that really wasn’t the point. The point was that I was able to step back and really study what was going on and formulate an opinion, from which I could have formulated a plan of action. I just had to have faith in myself, which hadn’t quite come yet but was certainly developing. If I had formulated a plan of action (I didn’t, unfortunately) and turned out to be wrong, I would have been fine as long as I’d remained flexible. The more you do this and the better you get at your strategies the more you’ll be able to pair the two and really start making hay.

Once I had enough experience and developed enough faith in my ability to read the markets it was a huge event for my trading. Eventually I developed a core approach that adapted to changing environments. Within my core approach I enter the markets each day by asking myself, “What has edge?” and sometimes more importantly, “What doesn’t have edge?” 

This is really a more discretionary way to trade the markets. I’ve heard it called the “toolbox” approach because if you develop a toolbox of strategies and let the markets tell you what’s working and what’s not working you can dig around in your toolbox and find the right tool – or strategy – for the job. 

But it’s important to understand that paying close attention and letting the markets guide you can also be very helpful for a portfolio that is traded through all environments. I call this a “constant” portfolio. It’s generally made up of either a diversified set of asset classes or a diversified set of strategies that is traded through any market environment. For instance, the former would be trend following in stocks and sectors hedged by positions in bonds and gold. The latter might be different market-neutral options strategies that each work in different environments so that when one is underperforming the others are outperforming.

Even if you’re trading a constant portfolio it can be helpful to watch the markets closely so that you know when it might be time to temporarily decrease risk allocation in those strategies that are underperforming in order to help your overall returns. In other words, you can improve your performance if you just take the time to watch your environment and stay adaptable and flexible.

Of course, the difficulty with a constant portfolio is having to continue trading components that are underperforming. That’s why I prefer the toolbox. I like to trade what’s working until it doesn’t work anymore and then dig around in my toolbox for what the markets are telling me might be the right tool for the job. That kind of trading just fits my personality.

This is really where the rubber meets the road. 

Up to now you’ve worked your way through the Foundation Phase, soaking in every piece of information and every concept you can, pushed your way through and out of the Exploration Phase, studying and testing as many trading styles and strategies as you can get your hands on and letting your instincts guide you to the right ones, successfully navigated through the Gravitation Phase, continuing to move forward by trusting your instincts and focusing on the right styles and strategies, accelerated through the Streamline Phase, gaining structure by focusing even more of your time and efforts on your favored styles and strategies and less time on the others, and landed firmly in the Muscle Phase, now working to get even stronger at your favored strategies until they became your core strategies – your unique and profitable approach.

You’ve taken all those concepts and strategies that other people developed and really started to make them your own. And you’ve stayed in the game. That’s a big deal.

Now that you’re in the Muscle Phase it’s time to get ripped by turning all of this hard work into real, consistent money. It’s time to put your trade plans into action. Just remember that the trade plans for the strategies you’ve back tested, simulated and traded live, were developed for a reason. And since they showed positive expectancy in back testing there’s no reason to deviate from them now. But following your trade plan in the live markets is harder than you might think.

The strategy’s trade plan determines where you’re going to enter and when, with how much risk, when you’re going to exit, how much money you want to make (your profit target) and how much you’re willing to lose (your max loss) as well as how you’re going to manage the trade (your pre-planned adjustments) and attempt to keep it viable through unexpected price movements, unfavorable conditions or a sudden environmental change.

Here’s an example of a trade plan for an iron condor strategy in index options, which has been back tested over 10 years and shows positive expectancy:

     Vehicle: $RUT

     Duration: 50 DTE (days to expiration)

     Enter after a down day in the $RUT

     Shorts at 10 Delta

     Longs 10-20 points away

     Target credit: at least 40 cents

     Profit Target: 10%

     Max Loss: 15%

     Exit at 7 DTE no matter what

     If Delta of the short increases by 10-12 roll the bad side and increase size by 10-15%

     If Theta approaches zero roll both sides to similar Delta you started with

It should be fairly obvious that the strategy is nothing without the trade plan. It’s like having the ingredients for a delicious cake without a recipe to follow and the instruments to actually mix it up, bake it and eat it. So if you want to mix it up, bake and enjoy that particularly delicious cake, you’ve got to follow the recipe. In other words, you’ve got to turn that concept into an actionable strategy.

Seems obvious right? Surely you’re going to follow that plan, right? Well, just wait until the markets throw you a curveball and you think you know better than the plan. It happens all the time, especially to newer traders and traders who haven’t yet developed the requisite discipline. But once you change the plan it ceases to be that strategy with positive expectancy and becomes something entirely different. It actually becomes a mystery at that point because now you don’t know for sure what you can reasonably expect. Just one change to the plan can alter the entire course of the trade.

In order to maintain the reasonable expectation of consistent profitability that you achieved in back testing you absolutely must have the discipline to execute your trade plan the way you designed it and tested it. Even through deep market selloffs and big market rallies you have to stick with your trade plan. After all, if you look through your back tests you’ll see that your plan may very well have endured similar kinds of market conditions (if you back tested it far enough). But looking at back test results is completely different than actually experiencing the trade in the live markets, which is why sticking with it can be such a challenge.

And then there are the so-called curveballs. When the markets do things that they didn’t do in back testing – no market environment is ever exactly the same – will you have the discipline to stick with the plan? When big news hits the tape and makes the S&P jump 3% in one trading day and then news hits the tape again overnight and makes the S&P reverse 3% the following trading day (this can happen), are you going to be able to stick to your plan? In order to be a consistently profitable trader over time you should definitely stick to it. This level of faith in your strategies is crucial not only for consistent profitability but for development as a disciplined trader.

That said, if you feel strongly about changing the plan because of a shift in market environment or because it turns out you don’t feel comfortable with the actual execution of the plan, the best thing to do is to stop trading the strategy and put it back in the testing environment. Determine if the change you want to make still yields positive expectancy and that it’s a plan you’d be comfortable trading. If it does and is, then you have a good reason to start simulating it so that you can eventually trade it again in the live markets. But you’ll have to commit to the new plan and not change it when the markets throw you those curveballs.

By the way – I think it’s very important to mention this here – when you start trading your strategies in the live markets for the first time, I highly recommend trading them at the smallest amount of risk possible. Your profits might not be meaningful but your losses won’t be out of your comfort level. And you’re just trying to learn whether or not the strategy is viable and the trade plan is realistic in the live environments anyway. You should be focused on learning about your strategy at that point, not generating profits from it yet.

But even at a small amount of risk it’s important to start placing live positions, removing live positions, getting filled by actual market makers and making and losing real money. This is how you get familiar with the real-world application of your strategy. Back testing is important for developing clear trade plans that show positive expectancy and simulating (paper trading) your strategies is crucial for understanding whether you’re comfortable with the trade plan and getting used to it, but trading in the live markets is where it all comes together for your strategy.

So what about those plans that you weren’t able to back test to your satisfaction because your approach is so highly discretionary? How do you go about testing and trading those strategies with any confidence? Well, this is where really paying attention to the market environment becomes so important. Always paying attention to your market environment is crucial no matter what your trading approach is, and I’ll talk about this in a subsequent step, but it’s even more crucial when your approach relies almost completely on the kind of market environment you’re in.

Following a trade plan that you’ve back tested and which follows clear guidelines and rules is hard enough. But when you’ve developed a more highly discretionary strategy that, let’s say, takes advantage of stocks and ETFs – including sector and index ETFs – that may be good candidates for your approach for only two or three months at a time based on the current environment, you obviously have to make decisions that rely on more immediate or short-term criteria. Nevertheless, you still need a very clear trade plan each time you make a trade. Otherwise you’re just flying blind and that’s a sure way to not be profitable.

You’ve got to follow the same protocols you followed for developing the trade plans of the more mechanical strategies: make sure the plans fit your lifestyle and that you’re willing to follow them.

And no matter what kind of strategy you’re executing, always write down your trade plan in a clear, concise way. If anyone were to ask you what your trade plan is for a particular strategy you want to be able to both explain it clearly without hesitating and show them the plan on paper or electronically.

Here’s an example of a discretionary bullish swing-trading plan in stocks:

     Stock is showing relative strength but has pulled back to its 50-day moving average

     ATR is at least 1.5 points over the last 14 days

     Its 50-day moving average is above its 200-day moving average

     Relative volume has remained low during pullback

     There is clear rotation into its sector

     S&P has pulled back to its 50-day moving average or lower

     S&P’s 50-day moving average is above its 200-day moving average

     Setup shows a minimum of a 1-to-5 risk-to-reward scenario

     Take half of position off at 5 points, one-quarter at 6 points and leave the rest to run

     Stop loss at 1 point from entry then trail up if price reaches 5-point target

Since I’m talking about actually applying your strategies this is a good time to discuss the concept of scaling up your risk capital. In my opinion, scaling up is not a one-size-fits-all thing. It depends on the nature of the strategy itself, its historical pattern of performance and its performance expectations in the current market environment, just to name a few.

There are different methods of scaling up, like reinvesting your profits so that you only lose what you make or waiting for a drawdown so that the probabilities are higher that your system will soon experience a win. Another method would be to gradually put more and more risk in your best setups. For instance, if you swing trade stocks or trade them intraday and you have a tiered setup system (A+, A, B+, etc.) then it makes the most sense to put more of your money in the setups that you’re best at and which show the best risk-to-reward profiles, and less risk in the lower tiered setups.

I’m a big proponent of scaling up very gradually, no matter what you’re trading. Don’t double your size overnight, scale up by small percentages. Maybe your next position will have just 10% more risk allocation than your last one. But make sure to trade at that risk allocation several times before jumping another 10%. This helps avoid high stress levels when thinking about losing larger amounts of money. When you’re sticking to your trade plans and closely following your max loss percentages, then you’re still losing that 10% you were losing before. Even if it may be a little more money than before it’s still the same percentage, and that can be helpful psychologically.

No matter how you do it scaling up takes some bravery and some confidence in your abilities and in your strategies. But you have to have a method of scaling up if you want to make real money in this business. 

This is another reason why having faith in yourself and your strategies is so important.  You’ve got to have this kind of faith as well as the discipline to follow your trade plans before you can even think about when and how to scale up your risk. This all goes hand-in-hand with getting better at what you do. 

Did I follow my trade plans?

Not in the beginning, that’s for sure. But enough futility and enough losses made me see the light.

My core approach incorporates both types of trading. I employ both highly discretionary strategies as well as more mechanical, even fully automated strategies. During the market selloff of February through March 2020 caused by the coronavirus pandemic my automated long volatility strategy kicked in to high gear and my net worth increased by multiples. Running that fully automated system ended up being one of the best things I’ve ever done as a trader because my faith in the strategy allowed me to stick with it during the drawdowns.

But then in March when the markets started to bounce I had to become much more flexible. The markets (and the world) had changed in a matter of a few months and I knew we could see either a continuation of the selloff or a big bounce. So I had to be ready for either. 

This is something I’ll talk about in a subsequent step, but what helped me continue to make money in the ensuing market environment was asking myself every day, “What has edge in this environment?” Especially if you’re a highly discretionary trader, you’ve got to do this in order to have a chance at staying consistently profitable.

No matter what I believe has edge in the current environment, though, I always have a very clear plan before I make a trade. I’ve learned from not following my plans, and from not even having plans when making trades, that it’s a recipe for consistent losing. And I always have a “What if?” in my plan just in case I’m wrong or in case something unexpected happens.

You see, the markets demand discipline. They know when you’re being lazy or when you think you’re smarter than they are and they’ll punish you accordingly. If they don’t punish you right away they’ll do it eventually. Sometimes the markets will let you make a run here or there without being disciplined, without any humility. But inevitably you’ll run into that painful, sometimes devastating loss because you’re not respecting them.

You’ve probably heard it said that it might be the worst thing for a new trader to actually experience success in the beginning because then the new trader believes he or she may have some special gift for trading or thinks trading is actually easy and not sure why everyone is so scared of it. Well, it’s true.

After I had taken my first course in technical analysis and options, my first trade was a covered call in AAPL. I based my decision on my primitive understanding of the charts at the time and hit a lucky streak. AAPL exploded and while I had to constantly roll up my short calls my long calls were making lots of money. By the time I hit $15,000 I was bragging to my friends about what I’d done after just one course. And then, of course, I gave it all back just as quickly as I’d made it.

How? I doubled up at the top and stopped selling calls because I figured AAPL would just keep going. In other words, I didn’t have a plan. I’d bought so many calls as AAPL kept advancing that when AAPL finally started to pull back the losses became too much for me so I panicked and sold out of my position. Since I didn’t have a plan, I took losses during the pullback instead of staying in for the move higher against support and the market gladly took my earnings back with a slap on the back and a “Thanks for playing!”

AAPL of course moved higher after my weak hands had been shaken out.

Have a plan and follow it. If you’re willing to execute your plan with discipline then you’ve taken a big step forward and equipped yourself with the tools necessary for consistent profitability.

To push yourself out of the Exploration Phase and directly onto the road that leads to the Gravitation Phase, which is so important, you need to start committing more time and effort to the trading styles that you’ve identified in order to find out if they really are the ones you should continue to focus on. Your instincts have led you here and you’ve trusted them so far, so now it’s time to dig a little deeper. 

After all, what is your ultimate goal? To become a consistently profitable trader, and as soon as you can. So why waste your time and efforts? 

So if you’re not already doing it now is the time to start focusing on back testing your favored strategies and determining whether or not they exhibit positive expectancy over time. If they do, then it’s another very important signal to you that these are the right strategies on which to focus and you should spend as much time as you have every day studying them and as much of the actual market day simulating (paper trading) them. Then, if you still like the strategies, you’ll want to begin trading them in the live markets at a very small amount of risk. This will keep you moving forward and ever closer to profitability.

What is positive expectancy? Put simply, it’s how much money on average you expect to make per trade over time, and it’s very important for having enough faith in your strategy so that you’re willing to take it through difficult market environments in which it will struggle. If it has positive expectancy then you have a reasonable expectation that it will emerge from tough periods and end up making more money than it loses over time. Making more than you lose over time is profitable trading.

So positive expectancy can literally tell you if you’re wasting your time. It also shows you that you don’t have to be right all the time, or even most of the time depending on the frequency of wins and losses and the discrepancy between the amounts of wins and losses. This is a very important concept for a new or struggling trader to understand. If you’ve got a strategy that makes money only 50% of the time but its winners are larger than its losers, then you have a profitable strategy over time. Let’s take a look at why this is true.

The formula for calculating the positive expectancy of your strategy is simple. Just take the percentage of time your strategy wins, or makes money, which is also referred to as the probability of profit, and multiply it by the average amount it makes each time it wins. Then take the percentage of time your strategy loses, which is also called the probability of loss, and multiply it by the average amount it loses each time. Subtract the second number from the first and you’ve got your positive expectancy. In other words:

ER = (PP x AW) – (PL x AL)

ER = Expectancy or Expected Return

PP = Percentage of the time your strategy wins, or Probability of Profit

AW = Average Win Amount

PL = Percentage of the time your strategy loses, or Probability of Loss

AL = Average Loss Amount

So you can see that even if your strategy wins only half the time making a little more money on each win than you lose on each loss gives you expected returns that are in the positive column over time. Let’s say your strategy makes $7.00 on average when it wins and it wins 50% of the time, while it loses $5.00 on average each time it loses and it loses 50% of the time. This is based on whatever risk allocation you’ve chosen for this particular strategy. Here’s how to calculate the Expected Return of your strategy at this risk allocation:

ER = (.50 x 7.00) – (.50 x 5.00) = 1.00

So the Expected Return for your strategy at this risk allocation is $1.00 per trade on average. If you trade the strategy 100 times in a year, you can expect to make $100 in that strategy for the year.

This means you don’t have to break your back trying to be right all the time. This is especially important for directional stock traders, like intraday traders and swing traders, because even if your strategy makes money only 30% of the time it will have a positive expectancy if its winners are much larger than its losers. And directional traders generally make money by cutting their losers and letting their winners run.

For instance, if a swing trader has a strategy that wins only 30% of the time but makes $15 on average for each win and loses 70% of the time but loses only $5 on average for each loss, she can still expect to make $1.00 per trade on average ((.30 x 15) – (.70 x 5) = 1.00). If she trades 1,000 times per year she can expect to make $1,000 that year from the strategy at that particular risk allocation.

With a higher win rate you can actually lose more on each loss than you make on each win and still achieve positive expectancy. This is a big deal for market-neutral options traders – also called “income” traders or “complex options spread” traders – because typically these traders employ strategies that win more often than they lose but their losers are larger than their winners. 

For instance, a typical market-neutral options trader who trades the cash indexes like $SPX and $RUT will put on an iron condor or butterfly with a plan for a profit target of 10% and a max loss exit of 12% to 15%. If he risks $10,000 for each trade and his strategy has been shown in back testing to win 75% of the time but make an average of only $1,000 on each win and lose 25% of the time at $1,500 average per loss, he can still expect to make an average of $375 per trade over time at that particular risk allocation.

So if the options trader trades his strategy 12 times per year (once per month) and can reasonably expect to have an average win-loss record of 9-3 over time at these numbers, he can expect to make an average of $375 per trade (per month) for a total of $4,500 on average each year at this particular risk allocation. This is a pretty optimistic expectation of returns, however, because the trader won’t realistically meet his full profit target on every win or hit his full max loss on every loss. So it’s more realistic for the trader to average about $750 per win vs. $1,200 per loss and make $262.50 per trade or $3,150 per year on average (closer to a 30% gross annual return). 

Don’t forget to subtract commissions if your broker charges them as well as exchange fees and other fees. You also need to consider slippage. Slippage can be defined as the difference between an individual trade’s expected price and the actual price at which the trade is filled or executed in the market. Slippage can be more meaningful to your returns than you think because if you’re getting filled at a much different – by different I mean worse – price than you were expecting it can really start to add up and negatively affect your expected results over time, especially if you trade frequently.

Positive expectancy is an extremely important concept because consistent profitability in trading is accomplished by making more money than you lose, NOT making money all the time. So this means you are going to lose money at times and you just have to accept it. If you’re making more money than you lose over time you’re a consistently profitable trader, even if your strategy actually makes money only 30% of the time as previously shown.

Remember, there is no “Golden Goose” or “Holy Grail” strategy. This is the bottom line and if you weren’t able to fully accept this in Step 2 please use this discussion about positive expectancy to force yourself to accept it now.

So I hope you’re starting to understand why this step is such an important one for keeping you moving forward and not running in place on the hamster wheel. Focusing most of your efforts on your favored strategies that have positive expectancy over time not only gets you a deeper understanding of these strategies, which leads to making them your own, but also gives you the confidence to stick with them through the hard times. 

Remember, though, that you need a large enough sample size for positive expectancy to be reliable. You can’t just conclude that a strategy yields positive results over time after just three trades. You’ve got to test and simulate your strategies over long historical periods through different market environments to know for sure. So you need good back testing software.

You can find software to back test most kinds of strategies but not necessarily all strategies. If your strategy isn’t easy to back test you’re just going to have to simulate it in real time for a while before determining whether or not you have enough faith in it to trade it in the live markets with a great degree of confidence. Strategies that are hard to back test are ones that rely on a high degree of trader discretion as opposed to those with very specific guidelines and rules that tend to be more mechanical.

If you find yourself hopping from strategy to strategy, looking for something that works all the time, this is one way to pry yourself out of it. This is how you can get yourself out of the Exploration Phase and into the Gravitation Phase. Use positive expectancy as a way to do this. Use it as that extra motivation you need to push yourself forward.

Then, as you simulate your favored strategies and transition into trading them in the live markets, make sure you’re journaling about every trade and keeping track of your results. Go back and review the details of each trade on a daily or weekly basis because this can be very important for determining whether or not it’s actually something you’re doing well or NOT doing well. When you identify trades and strategies that you are executing very well, it’s crucial information and something you can really build on. This is also how you effectively move to the next step because it helps you streamline your approach. 

Did I allocate my time and efforts effectively?

It took me a while to figure this one out so my strategy-hopping stage lasted longer than it should have. I hope by including this step I’ll help you keep moving forward instead of getting stuck in place.

I didn’t discover the concept of positive expectancy until years into my trading journey and when I discovered it I wished at the time that I had learned about it right off the bat. The concept was a powerful one for me because it focused my efforts on trading only those favored strategies that tested positively and as far back in time as possible, and it helped me start looking at losing money as just a necessary part of the game. It also helped me understand the profound effect which the overall market environment has on all strategies, which I will talk about in a later step.

As I said in the previous step, I was lucky because I had already discovered and was employing a profitable strategy when I started to really focus my efforts on the right things and allow myself to be guided by the concept of positive expectancy. I pretty much stumbled upon the profitable strategy, almost in spite of myself. But it made all the difference in the world because it showed me that profitable strategies DO exist and it gave me the confidence to stay in the markets long enough to finally develop profitable approaches in my favored strategies, which turned out to be swing and momentum trading in stocks and market-neutral options trading.

My automated strategy was in shorting VXX, which is an exchange-traded note (ETN) issued by Barclays that provides access to equity market volatility through VIX futures. In other words, it attempts to track the VIX, otherwise known as the “fear index”, and it was my first profitable strategy. It was that light at the end of the tunnel I’d been searching for. As I mentioned briefly in Step 3, I learned automated trading almost on a whim in late 2013. I’d been stuck in the strategy-hopping stage for almost two years by that time and thought I was close to hanging up my trading shoes. And when Andrew Falde started training me in automated trading I have to admit that after the first few sessions I wasn’t connecting to it.

But I realized the full value of what I was learning when several sessions into the course Andrew asked me what system I wanted to build and with what trading vehicle. Almost immediately VXX came to mind because I’d been a member of a trading room earlier that year in which the lead trader had constantly been talking about how profitable it was just to “short the VXX.” Although VXX drew a great deal of volume it was a relatively little-known product among retail traders at the time, having been issued in January of 2009 as a bond-type offering with a 10-year maturity date. When the lead trader would assert almost every day in the trading room that shorting the VXX was an almost sure way to make money, I had to follow up on it to see what the heck he was talking about.

Sure enough, when I pulled up a chart of VXX I could see why he kept recommending going short. All it did was go down. I hadn’t been trading very long but I hadn’t seen anything like it. I read somewhere and heard from other traders that it had a “negative drift” due to management costs or something like that but I didn’t really understand at the time. When I told Andrew that I wanted to see what the results of a system looked like that shorted the VXX and it came up consistently and highly profitable over time, I jumped right in to my education in exchange-traded volatility products.

I learned exactly why it had this crazy “negative drift” and started to understand why it behaved the way it behaved. And this led me to understand what market environments would be best for it and what market environments wouldn’t be so good. So I knew what to expect when I started running the automated system in the live markets in 2014. And this was the turning point because it was this system, along with a few other automated systems in gold miners and silver that year, that helped me to overcome my continued struggles with options trading and directional trading in stocks. My automated volatility systems have been profitable every year since 2014, and this has been a big deal for my trading. I was even able to secure private funding later that year for my automated short VXX system.

My point in talking about this is that it just takes one successful strategy to keep you in the markets long enough to find out who YOU are as a trader and develop your core trading approach. It just takes one successful strategy to launch a profitable trading career because it gives you the confidence you need to persevere. Without the automated VXX strategy it may very well have been too difficult for me to keep going until 2016 when I finally latched on to an options strategy that fit my personality and made consistent money. Without it I might not have been trading in 2017 when I finally developed a consistently profitable swing trading system.

Once I was making money in a strategy that I understood through and through and the concept of positive expectancy had been introduced to me, I was moving forward again and happily transitioned into the Gravitation Phase where I began the development of my core approach in automated systems in volatility, swing and momentum trading in stocks and market-neutral trading in options.