How to be Successful in the Stock Market

Updated: Oct 24, 2022

Make sure you know these things before you start trading.

Table of Contents

Your strategy must be positive EV
Backtest your strategy
You must have a solid risk management plan

Whether you are trading stocks, options, futures, or crypto, you must do some due diligence before putting your money at risk.

If your strategy lacks the following aspects, you should reconsider your approach. Learn how to be successful in the stock market with the following tips.

1- Your strategy must be positive EV

When a strategy has positive expected value (EV), it is expected to be profitable. The best way to figure this out is to determine your average win size and loss size. Once you determine these, you must evaluate your win rate.

For example, let’s say you have a strategy that risks $50 to make $100 each trade. This risk to reward requires a win rate of just 33% to break even. Therefore, if you win 34% or more of your trades, then your strategy has positive EV.

Mark Minervini's trading strategy is an excellent way to learn how to be successful in the stock market.

2- Backtest your strategy

Backtesting your strategy is important because it gives you a sense of what it is like to trade your system in real life. If you backtest your system through a rough market like 2008 or 2020, you will see how large your drawdowns will be.

Additionally, backtests allow you to determine an approximate win rate. The risk-to-reward ratio can be set however you like, but it is impossible to determine your win rate without backtesting.

3- You must have a solid risk management plan

Risk management is the most essential part of any trading strategy. If you fail to respect risk in any market, you can lose too much of your investment. Professional traders and hedge funds consider anything above 10% a solid annualized return.

A chart that shows the gains required to recover from a loss in the stock market.

The real risk of drawdowns.

Therefore, it is essential to keep drawdowns low so that you can quickly recover when they happen. The true cost of drawdowns is much worse than you may think.

Required returns for drawdown percentages:

-1% — +1%
-5% — +5%
-10% — +11%
-20% — +25%
-30% — +43%
-40% — +67%
-50% — +100%
-60% — +150%
-70% — +233%
-80% — +400%
-90% — +900%

According to the numbers above, keeping your drawdowns to a maximum of 10–20% is in your best interest. As the drawdowns get worse, it becomes exponentially harder to recover fully.

If 10% is considered a good annualized return, a 50% or higher drawdown may prevent you from recovering for multiple years. The idea is to control your drawdowns so that you can keep playing the game.

The stock market is a long-term game, but if you lose half your account or worse, you may spend too much time working to break even. I hope you learned how to be successful in the stock market and manage risk.