This is a tricky question that can have many different answers. We’ll try and tackle them all in this article as best we can. Making money in the market can depend on a number of things including, but not limited to: your personality type, the products you trade/invest in, what your time horizon is for your trades, your account size and tolerance for risk, your strategy and more.
Ultimately, it comes down to knowing yourself, what you’re like, how you typically react to things, and having reasonable expectations of what the market is likely to do.
For the sake of time (both yours and mine), we’re going to assume that you know the basics of how trading works, i.e. buy and sell orders, ticker symbols, going long and short, etc.
I think this is the most important thing that people consider, before they go full-blast into trading. Your personality type plays a big part in how successful you are on certain timeframes.
For instance, do you have a Scalper mentality that’s very fast and erratic, where you like to be in trades for 5 minutes and take a few ticks out of the market? Or are you a slower and more deliberate person, who likes to think long and hard about their trades, then ride the wave over a few days (or months)?
Seriously, Consider Your Personality
It is crucial that you seriously consider where you fit on this spectrum. A person who likes to scalp a few ticks in the market 20 times a day is most likely going to have a very difficult time sitting in 1 trade for a few weeks. That type of person is likely to force trades to try and make something happen (you should never force a trade), and are probably going to chop up their account in the process.
Conversely, if you’re a slower and more deliberate type of trader who likes to take time to plan out their trades, then you’re going to get burned trying to scalp. You’ll be too late to each trade, and likely be the sucker on the other end of the professional Scalper’s trade.
Neither is a wrong approach. If you’re a Scalper, good for you. If you’re a longer-term trade, good for you too. Just know what you specifically like to do and are good at.
Your Account Size
It’s a fact that it’s easier to make money with a larger account. Trying to trade in a small account (less than $25,000) has certain regulatory restrictions on it (namely the Pattern Day Trader Rule if you’re trading Stocks). If you’re trading Futures, the capital requirements are lower. Just know that you’re using a lot more leverage, which can be very dangerous.
Smaller Accounts Are More Stressful
Moreover, if you lose $10,000 on a $100k account, it has a different psychological effect than if you were to lose that much on a $25k account.
The larger your account size, the less risk you have to take to make a sustainable income. For instance, if you were to trade 5 E-Mini S&P Futures Contracts in a $125,000 account, you’ll be less stressed than the person who’s trying to trade 5 Contracts in a $5,000, and your Risk of Ruin will be much lower.
Strategy and personality go hand-in-hand. Not only that, but some products tend to behave in a more mean-reversion manner (like Index Futures), while other products (like Stocks) tend to have big breakout moves.
How your personality and style match what your trading can be the difference between profitability and failure. For instance, some people find huge success when they simply change what they’ve been trading to something that fits their style more appropriately.
It’s been said that the market tends to rotate (be mean reverting) about 85% of the time, and only trends about 15% of the time on a daily basis. What’s more, if you’re trading a product like the /ES or /NQ, the odds are already stacked against you if you’re trying to trade them in a trend following/breakout style.
If you like to “buy low and sell high”, a mean reversion strategy would be a good fit for you. In fact, learning to trade Options can give you a significant edge if you’re trading mean reversion. More importantly, you don’t have to trade Options to make them work for you, because Options are priced around the Bell Curve. If you apply what you know in a Stock/Future’s Options market, it will most likely benefit you greatly.
Trend Following / Breakout Trading
Trend following has been popular for the past few decades. At it’s core, trend following is identifying Stocks with good momentum and then riding the wave higher or lower. It’s different from mean reversion in that you’re “buying high to sell higher”.
Breakout trades usually lead to a momentum move in the market (if the breakout is successful). A breakout trade is simply when a market goes from rotation into trending. The breakout itself is when prices breach the trading range and start moving in one direction (i.e. trending).
Again there’s no right or wrong way to trade here. What’s important is that you figure out what you like to do best (or get good at both), and that you don’t try to trade a momentum strategy in a mean reversion environment.
Let me say that again. More often than not, you should not try to follow the trend in a mean reversion environment, and don’t force a trade. If anything, that piece of wisdom should save you some money.
Profitable trading is possible for anyone to achieve, but the reality is that not everyone will. Hopefully these tips have provided you some insight that will put you ahead of the curve. If you found any benefit whatsoever, please feel free to share with us in the comment section below. Thanks for reading!