​In his classic trading text “Trading in the Zone,” author Mark Douglas finishes his book with an exercise that he calls “Learning to Trade an Edge Like a Casino.” 
 
And it’s this skill that separates most amateurs from professionals in this field. We might have a statistical edge, but we give up at the first hint of trouble and run off looking for the Holy Grail. Does a Casino do that? Not if they want to stay in business. They don’t panic when someone wins big, because they know the odds are in their favor. 
 
It’s really worth your time to read through the entire exercise, but I’ll summarize the steps here: 
 

• Pick a Market - choose one actively traded stock, option, or futures market to trade. 
• Choose a set of market variables that define an edge - this can be any trading system that you want, as long as you feel that it has a statistical edge over time. The variables that you use to define your edge have to be absolutely precise; the system has to be defined so that it does not require you to make any subjective decisions or judgements about whether your edge is present. 
• Define Trade Entry - again, precision is key. There must be no ambiguity about whether an entry signal exists or not. 
• Stop Loss Exit - your methodology must tell you EXACTLY how much you need to risk to find out if the trade is going to work. 
• Time Frame - entry and exit signals must be based on the same time frame. 
• Profit exits - creating a system with a decent reward-to-risk opportunity is key so that the profits are worth the risk. 
• Testing - if you do not have access to backtesting software, then running a defined exercise on paper seems to be prudent. 
• Accepting the Risk on a 20-Run Sample Size - Calculate the potential loss on a typical trade based on your precise stop limits, and then multiply this by your run size of 20. The potential risk is that you might lose all 20 trades. It’s important that you “let go” of this capital and assume that it is already gone before the test commences. 
• Run the strategy per your rules - take twenty trades based on your precise set of rules, no exceptions. Your goal is not to win nor lose money, but rather to see if this system does indeed “work” as you drive it. 

 
How is this different from most retail traders running a system? In many ways! First, few precisely define their entry and exit rules, and then they compound this error by giving up too early when they find out that they are not truly comfortable with the aggregate risk. 
 
Consider running the Mark Douglas challenge with your own strategy, and let us know if you need any help doing so!