“There are just four kinds of bets. There are good bets, bad bets, bets that you win, and bets
that you lose. Winning a bad bet can be the most dangerous outcome of all, because a
success of that kind can encourage you to take more bad bets in the future, when the odds
will be running against you. You can also lose a good bet, no matter how sound the underlying
proposition, but if you keep placing good bets, over time, the law of averages will be working
for you.” – Larry Hite
Here are the elements of good trades:
- Your position size should be small enough to keep the volume down on your emotions.
- Your entry has to be based on a quantified signal.
- A good trade has a good risk/reward ratio. Your stop loss should be positioned so that if you are wrong then you lose a small amount of money. You have to leave your profit side open to capture trends when they occur.
- The odds of winning trades are greater when you go with the larger market trend. Buying dips in uptrends and selling rallies in downtrends have the best odds of success.
- Trades have to be taken inside a quantified system to have meaning above the randomness of any one trade.
- Good trades are taken inside your own trading timeframe.
- Good trades end in one of three ways: big wins, small wins, or small losses. A good trade never ends in a big loss.