The market is an ever-changing entity, each day presenting us with different and unique scenarios with no two days every the same. Nevertheless, the market is more or less a reflection of people’s ideas and attitudes and while it is also true that no two people are alike, each and every one of us has something in common with someone else, whether it’s the way we get out of bed in the morning or the foods we prefer to eat.
Additionally, we tend to repeat actions, such as preferring to brush our teeth at a certain time of day or making sure we try to catch the Thursday night prime time television shows. No matter which angle you look at it from, humans are creatures of habit and this tendency gets reflected in a security’s price movement. It’s what makes technical analysis a reliable and profitable method for analyzing the market.
The ability to adjust to changing market circumstances is just one of the traits of a successful trader. In truth though, there are quite a few. Over the years I’ve mentored quite a few traders. Many succeeded, but many of the traders I have spoken with over the years have failed. I have observed a number of traits which are present in those who succeed.
Some of the top traits of successful traders are as follows:
You’re probably wondering away just what do I mean by “staying neutral.” When you are chatting with your trading buddies online or reading a message board and all you hear are how the market maker or specialist is out to get them, or how one minute they are a market god and the next they have what is certifiably the worst luck in the entire world, then you are dealing with a trader that is NOT staying neutral! They are letting each trade or each trading day rule their emotions and this pressure builds upon itself, making it very difficult to succeed.
The professionals don’t let the day to day oscillations in their accounts faze them. The results of one day of trading, or even a few weeks or a month are not as important to them as the average over time. Among most of the professional traders I know, you cannot tell by their mere appearance whether or not they had a great day in the market or if they lost. Sure, they may tell you one way or the other.
Have business Plan
Most successful traders also have a business plan. As in any other profession, it’s important to know what it entails in order to succeed. As in any business, this consists of a set of rules or guidelines to help keep the trader on track and from making decisions purely on a whim.
Would you open a restaurant without a plan? No, or at least I really hope that you wouldn’t! A new restaurant owner must take into account the type of cuisine they wish to serve, the décor of the restaurant, the hours of operation, to whom they are catering as clientele, etc.
As in the restaurant business, traders must also have a business plan. A partial list of the questions you should be asking yourself and including in your trading plan are as follows:
How must time will you spend study and trading?
What techniques and strategies you will focus on?
What are the expenses involved in becoming a trader?
What is your maximum loss limit, not only per position, but on your account as a whole?
What are your objectives?
The more comprehensive your plan is, the better. You can always go back and change it, modifying it to suit your development as a trader. I find that it is very helpful, for instance, to go back and read over my techniques and goals whenever I am in a slump and my progress has stalled. It helps me maintain the right frame of mind so that I can push forward.
Keep a Journal
One of the first questions I ask any of my new clients is whether or not they have a trading journal, and if you, what does it consist of.
Most traders don’t even have a journal. Those that do have one typically keep it in a spreadsheet format. This offers very few insights into a trader’s personal style and strengths and weaknesses. Some things to consider when developing a trading journal are:
What techniques were used in locating the position?
Did you follow your entry, stop and exit criteria?
What pros and cons did the setup have?
What, if anything could you have done better and what are you most proud of?
It is also important to print out a chart of your trade. Mark both the entry and exit on the chart. If necessary, print it out on several time frames to show the details of the position.
Focus on Several Techniques that Work Well
Let’s take a minute to look at a typical college student. What kind of person majors in general studies? Unless they go on to focus on a specific occupation in graduate school or law school, etc., well-paying jobs will be hard to find for most of these students upon graduation. Instead, for those who focus their studies in one field, and more specially, one subdivision of that field, demand for their skills will be much higher. If you focus on just a few techniques, it allows you to really become an expert on the technique you are using. Great traders have several strategies that are their bread and butter plays and they will focus on them for as long as the market conditions favor them.
Remember: The jack of all trades and master of none is usually a low-paid, unskilled worker.
Being a Great Money Manager
Great traders are also great risk managers. They respect the risks they are taking and on each trade they risk a small amount of capital. Usually this is 1/4% to 1% per position (and no more than 2%). The idea is that you can’t trade tomorrow if you blow out today and if you can’t trade you won’t be a great trader, now will you?
Great traders protect their accounts. It’s their baby. Each position is so small they don’t really care what happens with it. It’s just a nick… win, lose, or draw. So, if they have a 200K account and are risking 1/4% on each trade, if they take a stop they are out $500. That’s a very small amount of money compared to the account. They can take a couple of hits and still be in the game.
Being Comfortable with Risk and Uncertainty
The sixth trait of great traders is that they are comfortable with risk. Let’s face it, trading is certainly risky and if you are afraid of the risk you won’t last. If you are afraid you will lose money, then I can say with near-certainty that you will.
Great traders are comfortable trading a pattern that is not a 100% sure-thing, because there simply is no such thing. Many new traders have a terrible time with this: the uncertainty of a trade, but you must overcome it. It is very easy to allow yourself to become frozen with fear over the risks and uncertainties of trading. Great traders get beyond it.
Accepting Personal Responsibility
Great traders accept personal responsibility for everything they do, even to an extreme. If I loan you $100 and you never pay me back, then yes, perhaps you are not a very honorable person, but I also made a poor choice to lend you the money in the first place. I made that choice, however, and I must accept personal responsibility for that action.
The same concept applies to trading. Many traders, lacking the expertise and confidence to make all their own decisions to begin with, will rely upon others for advice. The input may come from CNBC or it may come from a newsletter service or trading chat room or message board. It doesn’t matter where you get the original idea from, it is still up to you to implement it or not and you have the due diligence to stand behind your decisions and make them your own, whether they succeed or fail.
Using Risk Capital to Trade
Finally, great traders use risk capital. This should be obvious. They trade with money they can afford to lose. It is very difficult to trade well if you are worrying about paying your mortgage or putting food on the table. I’ve also seen a number of traders over the years take out equity loans to open a trading account. You are supposed to be limiting your risk and outside stressors, not adding to them if you wish to succeed. If you think you can be one of the exceptions, then you should really think again!
Trading with risk capital frees up your mind. It lets you trade and not worry about every little stop you have. You can just focus on trading correctly instead of trying to force yourself to meet certain financial needs. They say scared money never wins. Well, I have yet to see a person who has no other source of income or savings make a living off their $5,000 trading account.
Toni Hansen, www.tonihansen.com