An important factor that determines your profitability (it’s not what you think)

An important factor that determines your profitability (it’s not what you think)

When traders are looking for ways to become consistently profitable, they, sadly, tend to consider the wrong factors and looking for solutions in the wrong places. Yes, factors like hit rates, risk-to-reward ratios, risk control, etc. are very important to your career as a trader. Nonetheless, there is an important factor that determines your profitability, and it’s not what you think.

Know when not to trade
Yes, you need to know when to be in the markets and when to stay out of the markets. There are times when it is profitable to be in certain markets, and there are times when it is suicidal to be in such markets.
For example, it is far easier to make money in bullish crypto markets, especially when Bitcoin and most other altcoins are trending upwards protractedly. During this period, traders and investors are richly rewarded.

But when Bitcoin and other altcoins begin a bearish movement that holds out longer than what most people anticipate, both traders and investors suffer, as profitability dwindles. An apt example is what happened in 2018.

When FX markets are trending strongly, all counter-trend strategies will perform poorly. When the markets are quite choppy, trend-following strategies will fail. That is why you need to understand the kind of trading system you are using and the market type you are currently engaged in.

There is no strategy that can work in all market conditions: You either develop different strategies to deal with a bull market, consolidating markets, etc. If you cannot do this, then you need to stay out of the market which is not favorable to your trading system. An impatient trader can be sliced up in the market that threatens to plummet, but which fails to do so.

You don’t need to be in a particular market always
Some people think trading is hard, and they are somewhat correct because no-one knows what the market will do next. You may think it will go in a certain direction and you will be right. Sometimes, you may think it would go in a particular direction and you will be proven wrong.
Know when to trade and when not to trade. Your profitability is largely determined by how many losses you are able to avoid. Did you sustain some losses in the past? Think of how profitable you would be now if you had been able to avoid those losses.

Think of it: The more losses you have, the more your equity goes down. If you were able to avoid those losses, your equity would be saved from going down. Even when your hit rate is not very high, you will be able to go ahead by avoiding more and more losses.

There are many factors that determine a great football team, and one of the factors is the ability to concede very few goals. The fewer goals a team concedes, the better their chances of survival. The more goals they concede, the worse their chances of survival.

When a team is too desperate to win, they may charge and attack vigorously, while their defense becomes porous and vulnerable, and the opposing team may take advantage of that vulnerability.

You shouldn’t be too desperate to make profits, to the extent that you constantly find yourself in unfavorable market conditions and you take more sub-optimal trades based on poor setups, therefore scuttling your chances of profitability.

I have found ways to know when a particular market condition is favorable to my trading methodology and I take advantage of that. I have found ways to know when a market is no longer favorable to my trading method and I stay out of the market while looking for opportunities elsewhere.

What about you?

This piece is ended by the quote below:

“… If there was a game that mimicked trading it would be golf. A golf game is won by the person who makes the fewest catastrophic error and whose management of their internal game is superior to others. Incremental gains count.” – C. Tate

Source: https://learn2.trade/ 

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Author : Azeez Mustapha

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Azeez Mustapha is an experienced author, trader, markets analyst, signals strategist, and funds-manager.