You can succeed in trading only if you handle it as a serious intellectual pursuit. Emotional trading is lethal. To help ensure success, practice defensive money management. A good trader watches his capital as carefully as a professional scuba diver watches his air supply. - Alexander Elder, Trading for a Living

It is impossible to accurately and consistently forecast the markets.

We can't accurately predict our own performance either.

Even if we can forecast where the markets "should" go by detailed and careful analysis of supply and demand, or other fundamentals, the market is never so obliging and will tend always to be thrown off course by random events and the fickle nature of your fellow traders.

There is only one thing that we can control. That is the risk that you take when you trade.

No indicator will give you an edge over the other traders. There are powerful supercomputers running 24/7 backtesting every conceivable system. Neural nets. Genetic algorithms. Pattern recognition. Thousands of analysts looking at supply and demand. And then you get market makers who actually manipulate the market somewhat, causing short term movements in the market to blow away other trader's stop-loss orders and capture buy and sells not yet executed.

No one can claim that their indicator or method works any better than any other. In the end, there really aren't any methods that outperform coin tossing. Nevertheless, the toss of a coin itself, or the throw of a dice, while being random, can be traded profitably by someone with an appropriate money management system and suitable cash reserves.

There is only one field that is not random. There is one field that all traders must master if they will ever become more than a rank punter. Learn how to vary the size of your trades, when to increase a trading position and when to lighten one, and how to conserve your capital long enough to let sheer blind luck make you a good profit on a regular basis, and then you will progress from punter to trader.

The only way to win at trading is to have larger trade sizes (number of shares or number of futures contracts) in place when you are right, and less when you are wrong.

The best traders are not right more than 50% of the time, in fact they often have hideous hit rates that would embarrass a less experienced trader. But somehow they always seem to have huge amounts on money on the line when they are right, taking tiny losses when they are wrong.

If you are going to be wrong more often than when you are going to be right, you have to be a lot more right when you are right than wrong when you are wrong, professional traders don't aim to be right often, they aim to make so much money when they are right that they can afford to be wrong a lot.

There are techniques that professionals use to ensure this is the case.

Never let a winner become a loser. Trading is not the same as investment, you can't afford to average down to buy more stock at reasonable prices, you must make absolutely sure that when a trade turns against you you must be gone quickly.

Turkeys are often captured with a "turkey box". This contraption consists of a box with one edge held up by a twig. The hunter puts some food in the box, waiting for the birds to enter and eat, when the moment is right, he pulls a string and the stick is yanked away, making the box fall and trap the birds.

Traders who let the market move down on them are like hunters who never know when to pull the string. If 10 birds come to eat, but one walks out of the box, the hunter may choose to wait a moment for the bird to go back in. Two more walk out, but the hunter still waits perhaps for the birds to go back. One of the birds does reenter, but two leave. The hunter promises himself that he will pull the string if just one bird goes back under the box, but then another leaves. This could go on a few times, eventually the hunter loses all his birds because all walk out of the box. He could have taken 9, 8, 7, 6, 5, 4, 3, 2, or 1 bird, but he wound up letting every single one go, he had all the time in the world to pull the string and it certainly would have taken no effort or skill to pull it, but he didn't.

No matter how big a paper profit you have, it is never real until you have it in the bank. How many traders have patiently ridden a trend down right to nothing when they were waiting for some cue to sell on a promised upward move?

There are two aspects of money management:

Money management

Money management is minimising loss by cutting losing trades early and maximising the money made in profitable trades.

Risk management

Risk management is maximising profits by enduring you have lots of money in the market when you are right, minimising losses by ensuring that you never have too much money in the market when you lose.

Of course they are closely interrelated, and you can't have money management rules without risk management rules, or vice versa.

You must make sure that your profits are larger than you losses, not just slightly larger, but a lot larger. Most of your trades will fail, and all of your trades will involve the payment of brokerage and losses to slippage (difference between bid and ask prices).

Move your focus from being right often, to being very right occasionally. Unfortunately, the psychology of a trader works against him. Asymmetric loss aversion is a phenomenon that sees traders take great risks in order to avoid losses, while being rather more casual about gains. An investor that loses 10% will be far more upset than if he had made the same gain in dollars. As a result his trading style will naturally evolve in such a way as to take lots of little profits whenever he can, never wanting to be too "greedy". This leads to a high portfolio turnover, where commissions and slippage become enormously more influential than if he had taken a longer term time frame. In addition, he may become reckless to recover lost money, overtrading when behind, putting in most effort when obviously the conditions in the market that day are not the kind that favour his trading style.

If you deliberately take only small profits, the occasional unavoidable loss will be enough to wipe out the profits of dozens of winning trades.