How to Achieve Consistent Profitability
Foundation Series
Achieving consistent profitability in trading isn’t about finding the perfect strategy or the holy grail of indicators. Instead, it’s a journey of self-awareness, discipline, and structured planning. In his book Super Trader, Van Tharp lays out a framework for traders. His “Five Steps to Consistent Profits” are as much about understanding yourself as they are about understanding the markets.
1. Work on Yourself First
Tharp emphasizes the importance of addressing personal issues that might interfere with trading. Why? Trading is not just about the market—it’s about how you respond. Your fears, biases, and unresolved emotional baggage can wreak havoc on your decision-making.
Ed Seykota, a Market Wizard, once said:
“Win or lose, everybody gets what they want from the market. Some people seem to like to lose, so they win by losing money.”
This provocative quote underscores the idea that our beliefs and inner narratives shape our outcomes. You may unconsciously sabotage your trading if you subconsciously believe you don’t deserve success or wealth.
You can start by identifying your beliefs about money, success, and failure. Are they serving you or holding you back? Self-awareness and emotional management are the foundation of consistent profitability.
2. Create a Living Business Plan
Trading is a business, not a hobby. A business plan serves as a roadmap for your trading career, guiding your actions and helping you stay focused. Unlike traditional business plans designed to raise capital, this document is dynamic—a work in progress.
Your plan should include:
Mission and Vision: Why do you trade? What do you want to achieve? What are your objectives?
Rules and Strategies: Clearly define your trading setups, risk parameters, and exit strategies.
Performance Tracking: Outline how you’ll measure success, review your trades, and adjust your approach.
Think of this plan as your accountability partner, keeping you grounded in your process rather than chasing emotional whims. This document is your source of truth.
3. Develop Multiple Trading Strategies
The market is not a monolith. It moves through different phases: bullish trends, bearish downturns, sideways consolidations, and high-volatility spikes. A single strategy might perform brilliantly in one market type but falter in another.
Tharp advises developing several trading strategies that align with your broader market view and personal style. Each strategy should:
Fit your understanding of market dynamics.
Be backtested and forward-tested across various conditions.
Include clear rules for entry, exit, and risk management.
By diversifying your strategies, you create a toolkit that allows you to adapt to changing conditions while staying consistent in execution. Building a plan that works in all market environments is exceptionally challenging. Incorporating regime or stage analysis and creating tactics for the environment will improve your trading results.
4. Define Objectives and Position Sizing
Your objectives in trading should go beyond making money. Are you aiming for more free time? Portfolio growth? Risk reduction? Once you’ve clarified your goals, position sizing becomes a key tool to achieve them.
Position sizing isn’t just about how much you risk per trade; it’s about aligning your trades with your financial goals, personal goals, and risk tolerance. For example:
If you aim to protect capital, you might risk only 0.5% of your account per trade.
If you’re aggressively compounding, you might risk up to 2%.
You can explore the idea of market money if you want to blend a conservative and aggressive approach.
Position sizing should also account for the probability of loss, potential drawdowns, and your psychological comfort zone. Again, this is all to meet your goals.
5. Monitor Yourself and Minimize Mistakes
Trading is a performance activity, and like any athlete or musician, you need to evaluate and refine your performance constantly. According to Tharp, a mistake is any deviation from your trading plan. Without a plan, every action is, by definition, a mistake.
Here’s how to minimize mistakes:
Track Errors: Keep a journal of trades, noting when and why you deviated from your plan.
Identify Patterns: Are certain emotions or situations leading to repeated mistakes?
Commit to Improvement: Develop corrective actions to avoid repeating errors.
As Tharp warns, repeating the same mistake is self-sabotage. But by recognizing and addressing errors, you can steadily improve. Consistent profitability arises from this disciplined self-monitoring and continuous learning.
The Path to Consistent Profits
Achieving consistent profitability is not about quick wins or market predictions—it’s about mastering yourself, building a strong foundation, and refining your approach over time. Van Tharp’s five steps provide a practical and philosophical guide to doing just that.
Remember, trading success is a marathon, not a sprint. By working on yourself, building a living business plan, diversifying strategies, setting clear objectives, and monitoring your performance, you’ll be well on your way to steady, reliable profits.