After 8 years, 11,000+ hours, countless mistakes, blown accounts, books, mentors and chart reviews, these are the 20 principles that mattered most. I hope they will save you years on your trading journey. This is part 2 of the series How Trading Really Works with more to come. You can read part 1 [here](https://www.reddit.com/r/swingtrading/comments/1uebw89/how_trading_really_works_20_principles_you_need/).
**11. Stocks need a reason to move.**
For a long time I viewed the market as almost entirely technical. If the chart looked good, I wanted to trade it. Over time I started noticing that many of the biggest winners had something else going for them. Earnings surprises, revenue acceleration, new products, regulatory changes, a shift in the industry, stuff like that. This is also called an Episodic Pivot for those who are not familiar with the term.
Don't get me wrong, charts matter. A lot. But they often reflect something larger happening beneath the surface. One thing I've come to believe is that stocks need a reason to move. They need a catalyst. A spark that gets institutions interested and forces the market to reprice the company. The biggest winners are rarely random.
To keep things simple, I generally think about catalysts in three buckets:
**Fundamental catalysts** \- These are business-related developments that can radically change how the market values a company. Think earnings surprises, accelerating revenue, expanding margins, major contracts or successful product launches. These are often my favorite catalysts because they're rooted in something measurable.
**Story catalysts** \- Never underestimate the power of a good story. Stocks don't always need good fundamentals to perform well. Sometimes all they need is a compelling narrative. AI is a recent example. Meme stocks were another. Whether you personally believe the story is irrelevant. What matters is whether enough other people believe it.
**Macro catalysts** \- Sometimes the catalyst isn't the company itself. It's the world changing around it. Interest rates, regulations, commodity shocks, geopolitics or technological shifts can create entirely new winners. Money constantly rotates from one theme to another, that’s why spotting rotations can be incredibly profitable.
One thing I've noticed is that the biggest stock market winners often have all three working together at the same time. A beautiful chart, strong fundamentals, and a compelling narrative (in ideally, a favorable industry) is perhaps the most powerful combination I've found. That's also one of the reasons I built a dedicated "Monster Stocks" scan for myself which I made to ‘scan’ and find stocks that match these criteria.
*There are cats and dogs. Cats are stocks with a catalyst. Dogs are stocks with a story. Both can make big moves. - Stockbee.*
[Stocks need a reason to move](https://preview.redd.it/wv3tuhmohnnh1.png?width=1920&format=png&auto=webp&s=c8df8792b8af20773a8b7d210a850800dd7df556)
# MAKING MONEY
**12. Probabilities and outcomes.**
I was quite lucky that ever since I was a kid, I really loved games. That eventually evolved into playing poker professionally for a couple of years, which taught me something that later became incredibly valuable in trading: respect for math and probabilities. Most people are wired to above all seek certainty. But the markets don't work that way.
The biggest shift in my trading came when I stopped trying to predict what would happen next and started thinking in probabilities instead.
**Probabilities** \- Every setup has x probability of success. Your job isn't to predict outcomes. Your job is to observe objective reality and find the best situations where the odds are (heavily) skewed in your favor.
**Expectancy** \- An investor or trader with a very low win rate can still be incredibly profitable if the winners are significantly larger than the losers. This is because of their R Multiples (i.e. the math is ‘mathing’).
**R Multiples** \- Any time you risk a percentage of your portfolio it is an R unit. Let’s say you risk 0.5% but you made 4% on a trade, that means you risked 0.5R to make 8R, which is an 18X R multiple. That’s how you can have a 25% win rate and still make a fortune. If you only win 1 out of 4 trades, but every 4th trade you make +15R, you are crushing it. Because you lose -3 R in total to make +15R so your total profit is +12R.
Adaptability - Again, certainty doesn't exist in this business. The traders who survive longest are usually the ones most comfortable operating under uncertainty. I think that is a personality trait that’s difficult to learn, you either are adaptable and open minded, or you aren’t.
*Focus on making the best decision. The results will take care of themselves.- Annie Duke*
[Probabilities and outcomes](https://preview.redd.it/p4lvmjfvhnnh1.png?width=1920&format=png&auto=webp&s=51a91a5b7cf923427096b29e7e67760d51d5bd54)
**13. Entries and trading setups.**
Everyone wants the perfect entry and the perfect risk-to-reward ratio. The perfect signal. I spent years obsessing over this. One thing I've learned is that the market operates in two modes: contraction and expansion. Unless you are a real mean reversion trader, you usually want to buy during a ‘contraction’ and get paid during ‘expansion’. Because tight price action means a small stop loss at entry,thus a smaller risk and potential bigger reward when price expands once again. The other big realization was that constantly jumping between setups is a terrible idea. These days I have a handful of setups I focus on and I largely ignore everything else.
**Pullbacks** \- Buying pullbacks often allows you to enter earlier and with significantly better risk-to-reward than chasing strength. Wedge pops and right-side pullbacks are the name of the game here.
**Breakouts** \- As a momentum trader, I love buying stocks breaking out of tight patterns such as VCPs, flags, and bases. Ideally, I can see strong volume or a pocket pivot confirming institutional demand.
**Reversions** \- This setup comes from my FX background. I'm essentially looking for situations where a stock has become extremely overbought or oversold and is likely to ‘snap back’ in the opposite direction.
**Stop Placement** \- I always use a stop loss, no exceptions. Most of the time it's placed at the low of day (LOD), previous low of day (PLOD) or high of day (HOD) when trading reversions. At times it’s wider and more discretionary.
**ATR Distance** \- If a stock trades at e.g. $100 and has a $4 ATR, I generally don't want a stop that's significantly larger than that because it destroys my potential R multiple. Exceptions can be made if the previous day closed high on the bar and it's making new highs
**ADR Extension** \- I rarely buy overextended stocks. If a stock is very extended from the 50MA (e.g. $SNDK) I won’t buy it. I want to get in when it’s close to the 10/20/50 moving averages. In general I try not to buy when a stock has already made >50% of it's ADR for that day.
*You only need a couple of big winners a year. - Qullamaggie*
[Entries and trading setups](https://preview.redd.it/pitx5edyhnnh1.png?width=1920&format=png&auto=webp&s=ea962dd47b87e9f0babd58f071574a72be25629e)
**14. How to manage your trades.**
Early on, I treated the entry as the finish line. I'd spend hours finding a stock, analyzing the chart, planning the trade and calculating the risk, only to immediately start thinking about taking profits the moment I was up a tiny bit (fear). Looking back, that was one of the big mistakes I made.
Managing a trade is just as important as finding it, if not more important.
I like to think of it as jumping on a wild horse. My job isn't to predict exactly where it's going. My job is to stay on it for as long as possible while it's running in the right direction, and jump off quickly if things start to get ugly.
As Jesse Livermore once said, most of the money is made in the waiting. Holding a winner is where the potential life changing money is made. A single monster stock can make your month, quarter, year, or entire decade (e.g. $SNDK). The problem is that most traders, myself included, have a tendency to sell those winners far too early. These days I try to make trade management more systematic and less emotional.
**Taking Partials** \- As a stock becomes extended, I like trimming part of the position. A good way to look at this is to look at the distance from the 50MA measured in ATRs. Studies have shown that very few of the stocks move beyond a 7 ATR extension from the 50 smoothly. In addition, very few move beyond a 2x extension from the 200MA without a (significant) pullback.
**Stop to B/E** \- I like moving my stop to break-even relatively quickly. My philosophy has always been to take many small losses and capture a handful of very large winners. Once a trade reaches roughly 1.5-2R, I generally don't want it turning into a loser so I move my stop.
**Trailing stops** \- This is probably the simplest and most effective technique I've found. Instead of deciding when to sell, I let the market decide for me. Once I'm at break-even, I usually trail the position using the 10-day or 20-day moving average. The goal is to give the stock enough room to breathe without giving back too much.
[How to manage your trades](https://preview.redd.it/ghju9871innh1.png?width=1920&format=png&auto=webp&s=e5897cb08798ca75da0d3d03df33671b359468a0)
*The first rule of compounding: Never interrupt it unnecessarily. - Mark Spitznagel*
**15. Understanding position sizing.**
Position sizing is incredibly important. At the end of the day, trading is a game of money. You need capital to play and you need to protect that capital as if your life depends on it. In some ways, it actually does.
One thing I've noticed is that beginners are usually obsessed with making money, while experienced traders become increasingly obsessed with not losing it. I used to overtrade and revenge trade all the time. Looking back, this is one of those problems that eventually corrects itself. Either you get lucky and survive, or you blow up badly enough that you never want to experience that feeling again.
One thing that stood out to me when studying legendary traders is how little they talk about entries and how much they talk about exposure. How much should I buy? How much should I add? How much should I risk? Those questions matter because even the best setup in the world can fail.
**Risk of Ruin** \- If you don't have a genuine edge and you're risking large amounts of capital per trade, you will eventually blow up. It might not happen today or tomorrow, but it will happen eventually. Alternatively, death by a thousand cuts is a real thing (esp. in the current market).
**Peace of mind** \- This is probably my favorite position sizing rule. If I'm constantly checking a trade, thinking about it or struggling to sleep because of it, I'm definitely risking too much.
**General risk** \- For most people, risking around 1-2% per trade is the sweet spot. It's enough to make meaningful progress while still protecting you from the inevitable spirit-crushing losing streaks. This would be my general advice.
**Exposure** \- In the end, position sizing is very personal. Some people are comfortable risking 30% of their account on a single idea. Others prefer spreading risk across 10-20 positions. Neither is necessarily right or wrong. You just need to find what works for you.
*The key is not maximizing gains. The key is avoiding ruin. - Mark Spitznagel*
[Understanding position sizing](https://preview.redd.it/v9snxqz3innh1.png?width=1920&format=png&auto=webp&s=99efc92c053ee87414fe7e6a8bfd2bcde5079c8f)
# THE HUMAN SIDE
**16. The dark side of trading.**
Nobody talks about this part because it basically just sucks. Most people understand normal careers. They understand salaries, promotions, managers and job titles. Stuff like that. But nobody understands spending countless hours studying charts or trying to master a skill with no guaranteed outcome and no clear timeline.
There will be periods where you might be working harder than ever but have very little to show for it. Friends are progressing in their careers, buying houses, getting married and generally moving forward with life. It takes real character to push through that pain even when you aren’t sure that you are making progress at all. The strange thing about trading is that even when you're doing everything right, it can still feel like you're standing still. It's a horrible feeling I know all too well.
**Delayed gratification** \- Trading often requires years of work before results become visible. Most people underestimate how difficult that is psychologically as you get older.
**Obsession** \- The really successful traders and investors I've studied or met were all obsessed with the craft itself, not just the money. Simon Russo made $500M but still works on refining his ‘craft’.
**Independence** \- At some point you have to become comfortable trusting your own process instead of constantly looking for validation from other people. You need to be a strong independent thinker.
**Solitude** \- Many very successful traders seem remarkably comfortable spending long periods of time alone. Whether trading attracts those people or creates them, I'm honestly not sure.
*Experience is making mistakes and learning from them. - Mark Minervini*
[The dark side of trading](https://preview.redd.it/6xa65y3minnh1.png?width=1920&format=png&auto=webp&s=183ae17ddba3e1e75cda6a26c4f39ffcc73f31ca)
**17. The effects of blowing up accounts.**
I've blown up more accounts than I'd like to admit. If you're wondering where the money came from, it wasn't from wealthy parents, a trust fund or some lucky break. I always worked regular jobs, saved aggressively and put whatever capital I could into the market. Believe me, nobody prepares you for what happens psychologically when you blow up.
One of my earliest mentors, back when I was still trading FX, was a trading god in my eyes. He was making over $1.5M a year trading GBPUSD and USDCHF. Then one day a black swan event hit. He was overleveraged, lost roughly $1M that week and went on full tilt trying to make it back. It eventually cost him almost everything, including his marriage. He never traded again.
I've experienced smaller versions of this myself. Once in crypto and once in penny stocks. I both made and lost hundreds of thousands of dollars. Ouch. It took many years to recover financially and psychologically.
**Cashflow** \- Having income outside of trading is one of the biggest advantages you can have. It removes pressure and buys you time. I have to be honest, I haven’t always done that myself.
**Tilt** \- Most traders don't blow up because of one bad trade. They blow up because of what happens after the bad trade. Control your mind and your emotions before they control you. This is especially true if you experience brutal drawdowns or consecutive losses.
**Protect yourself** \- No trade, no setup and no opportunity is worth destroying your finances, relationships or mental health over. This is a great business to be in, but it’s not for everyone.
*Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1. - Warren Buffett*
[The effects of blowing up accounts](https://preview.redd.it/j6rvpyjtinnh1.png?width=1920&format=png&auto=webp&s=104431008f20ee8965225e7a34b9b0902cdcbfc5)
**18. What great traders have in common.**
One thing that stands out is that the great traders and investors often share very similar traits. Creativity, discipline, curiosity, conviction, low neuroticism, and high conscientiousness seem to show up often. Yet despite those similarities, trading styles can look completely different.
Some are momentum traders. Some are deep value investors. Some like to hold positions for years. Others hold them for hours. Some are highly systematic while others are almost entirely discretionary. Yet despite those major differences, they often operate from a set of similar principles.
Ronaldo and Messi are both all-time greats, but they arrived there through completely different styles. Trading seems to work the same way. The goal isn't to become a carbon copy of somebody else. The goal is to understand the principles that work and then gradually build a style that fits your own personality, strengths, and natural ways of thinking.
**Anti-traits** \- To be clear, there are certain traits that will not work as a trader or investor. High neuroticism, gambling tendencies, or being very extroverted by nature are not going to help you and will basically be disastrous for the vast majority of aspiring equity traders.
**Shared principles** \- Different traders use different strategies, but the good ones operate from similar principles: risk management, discipline, patience, timing, and a passion for what they do.
**Personal style** \- Again, the best strategy isn't necessarily the one that makes the most money. It's the one you can actually execute consistently for years, which eventually makes you the most money.
**Self-Awareness** \- I think most traders spend years looking for the perfect strategy when they should be spending more time understanding themselves. I keep a journal to always improve my self-awareness.
*The key to trading success is emotional discipline. - Victor Sperandeo*
[What great traders have in common](https://preview.redd.it/zpwd6afyinnh1.png?width=1920&format=png&auto=webp&s=af1e2a1654d52aaadd304cdc85d485fb763eb765)
**19. Studying and honing your craft.**
The previous point I guess brings me to another realization: studying is an inseparable part of becoming a profitable trader or investor. While it generally requires less time as your experience and capital grow, I don't think it ever really stops. If you genuinely dislike studying, I honestly don't think this is the right business for you.
Most people only see the winning trades. They don't see the thousands of hours spent behind the scenes building the skills that made those trades possible. Over time, I've found there are roughly four ways to study:
**Discovery** \- This is all about reading books, articles, interviews, research and communities. Most of it won't change your life. But every now and then you'll come across one idea that completely changes how you look at the market. Maybe this post?
**Practice** \- This is where most of the real work happens. Studying charts, reviewing trades, collecting screenshots, backtesting ideas and building pattern recognition. If you're serious about a setup, you should know what hundreds or thousands of examples look like.
**Ignorance** \- At some point, studying more becomes studying less. You need to stop constantly searching for new ideas and start refining your own process. Most traders spend too much time diverging and not enough time converging.
**Tinkering** \- Creativity matters. Some of the best ideas I've had came from experimenting. My mentor is always tinkering. Changing a rule. Testing a filter. Looking at something from a different angle. Small observations can make surprisingly large differences.
*In my whole life, I have known no wise people who didn't read all the time. - Charlie Munger*
[Studying and honing your craft](https://preview.redd.it/bvzeyik4jnnh1.png?width=1920&format=png&auto=webp&s=b40deaa341efd0c6ce3b5eb500428e1d9807cd4f)
# How Trading Really Works
I know this was a long read, so if you made it this far, thank you. This is part of my trading series which I'm writing with the hopes it will help you on your trading journey.
I hope there is at least one idea in here that will make you look at the markets differently from now on. Looking back, most of the lessons that moved the needle for me weren't particularly complicated. The difficult part was figuring out which lessons actually mattered and then applying them consistently over a long period of time.
There are no shortcuts in this business. There are smarter paths and better ways to learn, but eventually everyone has to put in the reps themselves. To help with that, I wanted to leave you with some of the books, tools and resources that helped me the most throughout my journey. These are things I genuinely use or have learned from over the years. Hopefully they save you a few years of wandering through the jungle.
Just for the record, these are not affiliate links.
**PS: If you made it this far, consider sharing this with others. I will write up part 3 soon, which will be more technical in nature where I discuss technical analysis in depth.**
**BONUS**
Make sure to check out [this](https://spiceliner.com/), which is built based on the principles shared in this post.
**RESOURCES**
[How Trading Really Works](https://canva.link/1cdvn093ndrv23e) (slides)
[How Trading Really Works](https://www.youtube.com/watch?v=-W4Z0rwOSxI&t=24s) (youtube)
**POSTS**
[How Trading Really Works - Part 1 ](https://www.reddit.com/r/swingtrading/comments/1uebw89/how_trading_really_works_20_principles_you_need/)
[How Trading Really Works - Part 2](https://www.reddit.com/r/swingtrading/comments/1w7tom2/how_trading_really_works_20_principles_you_need/)
**BOOKS**
[Reminiscence of a Stock Operator - Edwin Lefèvre](https://www.amazon.com/Reminiscences-Stock-Operator-Edwin-Lef%C3%A8vre/dp/0471770884/ref=sr_1_1?crid=ZBUZK3LQZZGI&dib=eyJ2IjoiMSJ9.vCrrRUPAFx5t0DPYsWDK4gw2RIxkl4lLCDCx4zXih5jZqZGcTqODa6WUqIibSyLH_aBpN7qUoPtD973QGZvuAOjJPg0vOjSMZp5tZTu_csP_3t2pFEHlhpPWpQmH7h5d3SilAA_Y9qc8nFmAkhWxsygvsh79KpicvajtZPBshiEzTOvWSChtKh63-oOX2tLmGqzwPdIUQLmBaZgoqNMHtoX9HE39-fXtU1X7t2M1I_Y.3unThvM5tjlUK6Q6K0ShXoaOkWI9zceOqEi-6n25e_4&dib_tag=se&keywords=edwin+lefevre+reminiscences+of+a+stock+operator&qid=1782128218&sprefix=edwin+lefe%2Caps%2C218&sr=8-1)
[How to Make Money In Stocks - William O’Neill](https://www.amazon.com/How-Make-Money-Stocks-Winning/dp/0071614133/ref=sr_1_1?crid=11PZLEO1R4C5U&dib=eyJ2IjoiMSJ9.wQkTz_8zvb575Vt61f8XfjEDfsOLt1iNngO5CxyaJ58h7UnRY1niLVVAva0rgsmtmS1F1zdSp9eXTB87_5evfL2m-AoduDlHqZVMWsg7qmsgWwMBPQJkBQ5FSy-uqwXciS1faxd4tXGCc9GXw38Pxw1m9if9F7dHHWlLuF-IryThrAtS8ekiz3ny6-GwJHyPfT2brV8gsKaaRTh5NbARQbCA1ShLPmxANkl4sNGvcko.pucGUCeCZvu6snz0EklNxhJrR5vg06NXj_OpYY5SD8g&dib_tag=se&keywords=how+to+make+money+in+stocks+william+o%27neil&nsdOptOutParam=true&qid=1782128233&sprefix=how+to+make+money%2Caps%2C224&sr=8-1)
[How I Made $2 Million in the Stock Market - Nicolas Darvas](https://www.amazon.com/dp/1614271690/?bestFormat=true&k=how%20i%20made%202%20million&ref_=nb_sb_ss_w_scx-ent-bk-ww_k2_1_12_de&crid=1OZZ37TKP0E24&sprefix=how%20I%20made%202)
[Principles of Professional Speculation - Victor Sperandeo](https://www.amazon.com/Trader-Vic-Principles-Professional-Speculation/dp/B01JO2ICZ4/ref=sr_1_8?crid=3EIQTLKR504QQ&dib=eyJ2IjoiMSJ9.t4xU5Q94oBM8j9Lrv89DKFArOLy-D4OduSXu3aMpAz_D6ctE8echZCWZHdURlrYx_sAHoQFxIE54I9ZnRJdhJvy9aWkRosuRbtZASiqiyfcyceASBMarKBxrOwkyFm27WNQ2y7G4bz8dFKyMDQdvxw.RTBe2wLdZDXqoaMosonDnPXhamKR1EAJvnE-VWHPw-I&dib_tag=se&keywords=victor+sperandeo&qid=1782153872&sprefix=victor+sper%2Caps%2C212&sr=8-8)
[Trade like a Stock Market Wizard - Mark Minervini](https://www.amazon.com/Trade-Like-Stock-Market-Wizard/dp/0071807225/ref=pd_rhf_se_s_pd_sbs_rvi_d_sccl_2_4/137-0694476-4403027?pd_rd_w=inyGB&content-id=amzn1.sym.6640a844-ab24-4352-ac9b-78899e683a5e&pf_rd_p=6640a844-ab24-4352-ac9b-78899e683a5e&pf_rd_r=NJHFME6TSBPWZPWXW1YY&pd_rd_wg=jbj9E&pd_rd_r=0ee964c1-3097-4789-9893-7d58738eba27&pd_rd_i=0071807225&psc=1)
[Market Wizards - Jack Schwartz](https://www.amazon.com/Market-Wizards-Generation-Worlds-Traders/dp/B0H422VMHM/ref=sr_1_1?crid=JLFKZDKVW6BB&dib=eyJ2IjoiMSJ9.vBj36HD0YK1qJRUAilV0LZQm_YCKj-pHrEUUVYO1cQBWmcWZXNIrst1ipsHVPcXla4Op1NyLTVq1SVT3MbMyEDftQJgpFTEcdZGVDfWppnbE2X-aCXLzNIepNFF9d1Qg53O5KYACBOhFai83Miom-FXV6kkxdkDhSWTg6QxAuuklBYRCCF9aqHCw_NAdkjLanow3LbIa1fXaynKSIp88WLRkrqu_0kk3gJvkXj7hSHo.LS2IVBu8UbVNJtpzP6MxGUTv_E1Wj2tBblK3ItFnIeY&dib_tag=se&keywords=market+wizards&qid=1782128261&s=books&sprefix=market+wizards%2Cstripbooks-intl-ship%2C197&sr=1-1)
[Dao of Capital - Mark Spitznagel](https://www.amazon.com/Dao-Capital-Austrian-Investing-Distorted/dp/B08DH78T9N/ref=sr_1_1?crid=D3NY3BU1CBJ3&dib=eyJ2IjoiMSJ9.b8Y7CF1XzkYe6v9EcnI23Q.xsgs1S170Ei8FwM76Bl5md6O-5qDI_onHFdAPQyGzbw&dib_tag=se&keywords=dao+of+capital&qid=1782128272&s=audible&sprefix=dao+of+capital%2Caudible%2C201&sr=1-1)
**YOUTUBE**
[Stockbee](https://www.youtube.com/@Stockbeevideos)
[Qullamaggie](https://www.youtube.com/@Qullamaggie)
[Trading Lion](https://www.youtube.com/TraderLion)
[Roaring Kitty](https://www.youtube.com/@RoaringKitty)
**TOOLS**
[TC2000](https://www.tc2000.com/pricing/yennguyen?gad_source=1)
[Spiceliner](https://spiceliner.com/)
[Finviz](https://finviz.com/map)
[TradingView](https://www.tradingview.com/)
**PEOPLE**
[Jeff Sun](https://jfsrev.substack.com/p/my-trading-tools-process-routine)
[Qullamaggie](https://qullamaggie.com/)
[Mark Minervini](https://www.youtube.com/@TheRealMarkMinervini)
[Evan Evans](https://x.com/evanevans)
[Dan Zanger](https://www.youtube.com/@DanZanger)
[Lone Stock Trader](https://x.com/LoneStockTrader)
[Jim Roppel](https://roppelreport.com/)
**BONUS**. A TLDR for the lazy lurkers
1. Big winners need catalysts: fundamentals, stories, or macro events.
2. Trading is mostly about probabilities. Certainty doesn't exist.
3. Master a few setups. Know 1-3 deeply, not 20 superficially.
4. Holding winners matters more than finding them. Trail your positions.
5. Position sizing is everything. Survive first, profit second.
6. Trading is very lonely. Most people won't understand the journey.
7. Blowing up hurts and can ruin you. Risk management is non-negotiable.
8. Principles are universal. Styles are personal. Find your style.
9. Studying never ends. The best traders are lifelong students.
10. Success is simple, but it’s not easy + shared recommended tools etc.
11. Reading my TLDR is not enough. Stop cutting corners. Do the work.