Lesson 9: How To Develop Consistency In A Random Market

We become what we want to be by consistently being what we want to become each day. 

All traders aim for consistency. Great inconsistent returns are not valuable relative to small, consistent returns. The force of compound interest only works when our trading is consistent. 

Volatile trading systems tend to be inconsistent and riskier generally. 

The trader’s objective is to develop a framework that generates money consistently. Unfortunately, it typically takes an average of two to five years to attain consistency. Inconsistency means failure in the markets. 

New traders often focus on going fast-taking more trades, making more big trades rather than build the consistency that can nourish a trading career. Human nature makes them myopic. Short-term thinking overcomes long-term strategic thinking. 

A trader with a long-term view makes different decisions in the market. It’s hard to succeed in trading without thinking about the long-term implications of our choices. So we perfect our trading by making improvements during trading hours and building consistency in our lives outside of trading.

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It is through consistency that we build habit patterns. Those habits reinforce qualities in us that show up in our work. We have already covered the value of trading habits and explained how to develop them in our trading. 

After this lesson, the reader will understand the value of consistency and how to develop it in the markets. 

Below are tips that we can use to develop consistency in our trading. 

Find a consistent trading process. 

Often traders fail due to inconsistent trading processes. A good example is a trader who has not found a systematic way to make decisions. He jumps into trade opportunities any time, has no methodology for identifying trade setups, and his trading day has no structure. 

On the flip side, winning traders have a consistent trading process. Research is done systematically. For example, swing traders often analyze markets during weekends. Risks are studied systematically. Entries and exits are similar. 

To attain consistency of outcome, we must achieve consistency of process. This idea explains why structure and organization are essential to a trader. 

Develop a positive expectancy system 

Trading is about risk and reward. Every day traders take risks in the market. Positive expectancy is defined as how much money, on average, we can expect to make for every dollar we risk. 

Most traders fail at trading because, on average, their losers are more significant than the winners. A negative expectancy system loses money in the long run. A negative system loses money despite discipline. 

Let us look at two different trading systems. System A and System B. 

System A has a hit rate of 50% and makes about three dollars for every dollar risked. 

In a streak of 10 trades, the system will make about 10R. Here is the calculation; Hit rate – 50%. 

Risk-reward( R multiple) – 1:3. 

Number of Trades- 10

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Winning Trades – 5 

Losing Trades- 5 

Return on winning trades – 3×5= 15 

Return on losing trades – 1×5 = 5 

Average rate of return( Return on Winners- Losers). In this case; 15×5 = 10 R 

System A will make money in the long run despite some losing trades. 

System B is an example of a negative expectancy system. A hit rate of 35% combined with a risk-reward ratio of one to two (1:2) won’t make money. 

Hit Rate – 35% 

Risk-reward( R multiple) – 1:2 

Number of trades – 10 

Winning trades – 3 

Losing trades – 7 

Return on winning trades – 3×2 = 6 

Return on losing trades = 1×7 

The average rate of return = Return on Winners – Losers). In this case; 6-7= -1 

A negative expectancy system loses money in the long-run despite a disciplined way of trading. 

Use of Rules to develop consistency 

Rules help to define behavior. They bring order during the chaos. So we need rules in our trading, just like we need rules in life. It’s hard to attain anything meaningful without rules. So we need to come up with trading rules. 

At this point, I will share a road map that will help prepare your trading rules. Breaking rules is a mistake in trading despite the outcome. On the other hand, a win out of a broken trading rule is dangerous as it cements destructive trading behaviors.

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1. Rules for Position sizing – How do we plan to position size? What rules will we use to ensure we always stick to the strategy. 

2. Rules for Entry – Good trading is about reacting, not predicting. We can improve timing entries by creating rules that help us focus on the reaction. An example would be; no execution before candlestick closes. 

3. Rules for Exits- Trade management is challenging for many traders. Rules for exits are designed to help us retain objectivity despite trading pressure. 

4. Rules for Idea generation- Research should be structured. Defined rules allow for clarity. 

5. Practices for managing yourself – Self-analysis will help in maintaining productive states of mind. 

Mastery over one trading strategy 

Less is more. Newbies often start with many indicators. Trading is about finding a niche and narrowing down on it. Finding one setup that works and honing down on it is what will create consistency. 

Pattern recognition is all about finding this setup. Newbie traders fail due to system hoping. They may find a trade setup that works, but they can quickly dismiss it and look for another trade setup when it starts losing. Successful trading is a long-term game. 

In your early days, focusing on a few markets, trade setups, and indicators will help. By slowly mastering one strategy, we can build confidence which will then translate to sustained progress. 

Start with small position sizing. 

Ramping up position sizing before attaining consistency is Russian roulette. What kills most traders? It’s a lack of proper position sizing. They risk too much on each setup. Over position, sizing has taken many traders out of business. 

In your early days, focus on taking small risks. First, establish consistency, and then you can think about taking more risks. Small sizes will reduce the emotionality in trading.