On Tuesday, I told you exactly what I mean when I say “pattern trading.”
The main difference between me and most pattern traders is that they trade chart patterns that anyone can see…
But, as I showed you, the patterns I track every day the markets are open on hundreds of different stocks are completely invisible to everyone else.
But here’s the thing. And listen up because this is important.
I’m not just a pattern trader. I’m a rules-based pattern trader.
Because, like many of you, when I was first starting out trading in my 20s, I only had one rule: make money.
And as you might have guessed, my first journey into trading didn’t go well. It lasted about six monthsand resulted in me losing all my capital – and then some.
That’s when I knew I was going to have to refine my approach.
That was more than 30 years ago. And in the decades since, I’ve made a fortune in the markets trading stocks, options, and crypto.
Ever since, I’ve been trying to pay it forward by showing ordinary folks exactly how I achieved success.
So starting today, I want to share with you my rules – what I call the Habits of Profitable Traders.
The first habit is simple: Build your trading plan.
But before you even get to that, you’re going to want to ask yourself three important questions.
Let’s get started…
Money Is the Result of Profitable Trading, But It Shouldn’t Be the Goal
In order tobecome a profitable trader, you must start at the bottom and build the proper foundation.
Think of it like building a house. You must survey the land and build a strong foundation, or the whole thing collapses.
So before you start building your trading plan, you must take stock and ask yourself these questions:
Question No. 1: What do I want out of trading?
If your answer is money, then run (don’t walk) away.
Money is the result of profitable trading, but it shouldn’t be the goal, for two reasons.
First, most people have an irrational emotional relationship with money. So, if money is driving your trading, you’re more likely to make emotional decisions that result in a loss.
Second, money is just the icing on the cake, a means to an end. Money itself isn’t the goal – it’s what money can help you achieve.
So I recommend you take some time to outline your goals. Do you want to quit your job and trade full time? Do you want to send your kids (or grandkids) to college? Do you want to travel the world? Do you want to give more to your church or favorite charity?
These are real goals that you can achieve by becoming a profitable trader. I should know. I’ve made enough money in the markets to do all this and more.
But the best goal, in my mind, is also the simplest: to become a better trader. Whether you’re trading to take control of your finances, or keep your mind sharp in your golden years, or earn your living, you should look at trading as something you love to do.
Your desire to become a better trader should be the thing that keeps you focused on success every day.
Question No. 2: What am I willing to sacrifice to achieve my goals?
Trading doesn’t come without a price.
There are two things any person will sacrifice over time to become a great trader…
-
Time
Education means spending time away from something else that you might want to do.
And I’m talking things like pursuing other hobbies, binge-watching your favorite TV show, going out with your friends. However you spend your free time right now, you’re going to have to dedicate some of it to trading.
But you have to think about it as an investment in the goals you just outlined.
Just like any educational journey, we are looking to reap the rewards over time, not capitalize right away.
Because learning to trade is a process. And that process takes time.
So before you begin, you have to think about what kind of trader you want to be, and ultimately, how much time you can sacrifice to learn to trade.
Think hard about this one before you answer because your life has something to do with it. If you work 60 hours a week, it’s impossible to be a day trader, too.
A friend of mine who used to work for a big company tried to become a day trader – and guess what happened?
He half-assed everything and lost both his trading account and his job.
Part of creating a trading plan is tailoring it to fit your own life. If you only have an hour a day to trade, day trading is probably out of the question, but it’s a reasonable amount of time for swing trading, for example.
-
Money
Now, one thing I’ve heard a lot over the years is “I don’t have the money to trade.”
But here are just three examples of sacrifices you can make right now to save more than $12,000 per year to put towards trading:
-
Starbucks Latte – $6 a day, $30 a week, 120 a month, $1440 a year
-
Lunch Out – $20 day, $120 a week, $480 a month, $5760 a year
-
Cigarettes/ Vaping/ THC – Varies $100 a week, $400 month, $4800 a year.
If you’re not willing to make sacrifices like these, trading may not be for you.
Take a look at your finances and see if there’s any fat you can cut from your monthlybudget and put toward trading. I bet you find more money than you think.
Do you really need all those streaming services? Or the gym membership you never have time to use?
You just have to decide that achieving the goals is more important than your morning latte or that midday Door Dash order.
It’s up to you.
Question No. 3: Can I take responsibility for my trading?
Here’s one that 90% of novice traders fail to learn – so pay attention.
There’s two parts to this:
-
Take responsibility for your education
Your education is your responsibility – top to bottom.
That means the little things, like studying, reading, taking notes, learning the nuts and bolts of trading. It’s… a lot of math. It can get boring.
This is where a lot of folks get into trouble.
They want to take a shortcut, which usually involves jumping into the market using trading strategies or investment vehicles they don’t understand.
Here’s what I mean…
If you are going to buy a bull call spread on Google, there are several things you have to understand, starting with your maximum risk and maximum reward.
But how much money you stand to lose or gain is only part of it…
You also need to understand:
-
What the price movement (delta) of Google can do to your spread;
-
How the other “option Greeks” can impact your position;
-
What will happen if you hang on to your spread through expiration;
-
What will happen if the price of Google is below your strikes, above your strikes, or between your strikes on expiration day;
-
And the exercise and assignment of options and how it will affect your position.
I’m amazed at how many novice traders will sink good money on a strategy they don’t understand – and it usually costs them dearly.
So take your education seriously. And this last point is even more important…
-
Take responsibility for your actions
Here’s another one that most people miss the mark on…
Years ago, I remember watching TVand taking a position in the markets based on what someone else was saying about a stock.
I remember cursing that individual after the trade became a loss – shifting blame to the talking head on TV.
In reality, it was my responsibility that I took the trade without any research…
My responsibility that I took the trade during periods of high volatility…
And my responsibility that I leveraged myself to the hilt, resulting in my first (and only) margin call.
Regardless of where you get your information, you and you alone enter and exit the trade.
When you accept total responsibility for your trading, you close the door to excuses. That is one giant leap away from the crowd – and one giant leap toward consistent success in the markets.
Taking responsibility for your actions also means learning from your mistakes – so they don’t cost you again.
That’s all for now.
Next week, we’ll reconvene and talk about how to build a successful trading plan from the ground up.
Meantime, I’d love to hear about your answers to today’s questions – especially your goals as a trader. Try to formulate your goals with what you want to achieve rather than how much money you want to make. Send me your thoughts here.
Good trading,
Tom Gentile
America’s Pattern Trader