You can run into certain cases of people who have made a killing over windfall profits, but usually the only investors who earn constant profits in the financial markets are the ones who have clearly outlined investment strategies that they follow strictly.
To achieve a profitable strategy, leaving no room for interpretation, it is necessary to define very well at least the following elements:
1 Openings: we must clearly know under which circumstances an operation should be opened, and open them only when these conditions are fulfilled. Neither before nor after. It is important not to cave in, trying to open an operation once the opportunity passed or out of the method. If it’s not the right time, breathe deeply and wait for the next chance.
2 Opening Positions Control: Depending on the difference between the possible losses and profits of each operation (the earnings ratio you are looking for 1:1, 1:2, 1:3…) you may consider necessary to update the Stop Loss as the operation is moving to our advantage. These Stop Loss modifications must be also recorded in the strategy.
3 Closing Positions: When opening any operation, two limits must be set; The closing point in case of losses (Stop Loss) and in case of profits (Take profit). Without a Stop Loss, you could lose all your money even though the percentage of successful operations may be higher (we already explained this in the article about the roulette →), and if you don’t have an adequate Take Profit, you could be winning many times without earning any profits as you may not be earning enough each time.
4 Account Management: Without any doubts, the most important and essential part of any strategy is oddly enough the one for which we care less (except when you are already into bankruptcy). The decision about what the investment percentage will be in each operation, how many positions can be open at the same time, under which conditions (maximum percentage of the account being risked at the same time), and at what level of losses you are going to consider that the system isn’t working in order to withdraw the money from the investment.
We know many investors who rely entirely on their ‘intuition’. Intuition can be of two kinds: a set of rules in your mind based on previous experience and study (but non-written rules nevertheless), or a simple hunch you may have at a particular time, following your ‘heart’. If you belong to the second group of investors we have bad news for you: on the long run, we are almost certain that you’ll be losing money.
Smart Openings + Defined Closings + Open Positions Control + Account Management = Profits
With the four parameters defined above, it is not granted that you’ll be earning profits, but what is certain is that you’ll have greater chances of earning them. It doesn’t matter how good a strategy is, the issue lies in determining how many failed operations you can withstand, and depending on that number, calculate what the risk will be for each operation. A system that is almost perfect is worthless if it loses all your money in three operations. The account management is the most important thing in any system.
Once you have your system completely defined, write it down with as much detail as you can and follow the rules, if you ever hesitate about what to do about a specific operation, it means that the system is not fully defined and that it’s necessary to increase the level of detail.
The last step; try your strategy first with a demo account without money, or if you wish, with an insignificant amount so that the attempt is completely real. We will be explaining each one of the elements in the strategy in the next articles.