“If I wanted to become a tramp, I would seek information and advice from the most successful tramp I could find. If I wanted to become a failure, I would seek advice from people who have never succeeded. If I wanted to succeed in all things, I would look around me for those who are succeeding, and do as they have done."
Joseph Marshall Wade
Along my own trading journey, I have met many intelligent and savvy people who have taught me something about myself and trading.
Through this journey I have been able to compile a short list of what many of these people did, even though they had all sorts of different trading styles.
I will be the first to admit that when I started trading, I was as naive as anyone. The biggest challenge that then arose for me was accepting losing trades. This did not sit well with me at all. I think it was probably reading the book Market Wizards by Jack Schwager that made me realise that even the very successful traders all had losing trades. Not every trade was profitable. So, I realised in that sense, I wasn’t any different from them. The difference was how they reacted to those losing trades.
All the traders interviewed in that book (without exception) emphasised that cutting losses was one of the most important things (if not the most important) they did! The fact that they all said it, despite their vast array of different trading approaches, meant a lot to me and convinced me of the importance of doing it. This was a turning point in my trading.
It was from reading this book and gaining an insight into the minds of some highly successful traders that I realised some vital ingredients for trading well.
From the people I have met and learned from, their trading styles and the markets they traded were different, yet the principles that they believe in are all similar. This is the key – what key principles do they all believe are paramount to a trader’s success.
However this list does not contain your typical items like: cut losses, be disciplined, manage risk etc. The items present a slightly different view on trading and matters they may not be as obvious to you.
Here is my list:
1. They plan every single trade.
Every trader I've talked with that makes money consistently knows the following about every single trade they take before they even begin entering a limit order into their trading platform:
- The highest price they are willing to pay (if they are going long) or the lowest price at which they are willing to sell (if they are going short)
- How they will trail their stop if they are ‘right’
- Their stop loss where they will exit if they are ‘wrong’
- The potential reward/risk ratio of the trade
- The exact percentage of their account they are risking
Lots of traders do one or two of these things. Few do all of them. In simple terms they know exactly what they want to pay, how much money they anticipate making (or losing) and a very clear idea on the probability of the trade working out.
Although you might think that every great trader uses hard stops that are pre-programmed in, many don’t. However, they are highly disciplined and when their stop loss number comes up they are out. Most traders don't have that type of strong discipline and so a hard stop loss is still their best option.
2. They stopped trying to pick tops and bottoms years ago
Many classes, courses and webinars you'll find talk about using support and resistance of some type to find where a market is turning and how to get in before or while it does.
The funny thing is that only a very few successful traders I have ever talked to trade that way. Simply put, 95% of the traders out there that make money are buying higher highs and selling lower lows. They do the exact opposite of nearly everyone out there because they found out long ago that picking tops and bottoms is a sucker's bet.
One trader described it to me by saying that it's much easier to just participate in what a market is already doing than trying to guess when that behaviour will change. Twist your strategy around to agree with what the market is doing rather than guessing on when it will change its mind, and you'll be in a much better position to make money trading.
3. They are patient with winners - and ridiculously impatient with losers
Dennis Gartman is famous for boiling down great trading to one thing: "Do more of what is working and less of what isn't."
Most traders have a great deal of patience with their losers but get nervous about locking in gains and sell them too quickly - the exact opposite of what successful traders do. Successful traders realise that they may actually have more losing trades than winning trades so they quickly get out when they are wrong. It is the only way to ensure that they can give their winners the attention they deserve.
They pamper their winners and kick their losers to the curb without a second thought.
4. They trade one market.
I've talked with great traders who can trade futures, forex and stocks at the same time. They are a gifted tiny minority.
Most successful traders concentrate on one market and become so comfortable with it that they begin to "know" the behaviour of that market just watching price and volume. Test yourself - if you can’t get rid of all your charts and simply look at price and volume to trade, you're probably not concentrating enough on one market in order to know its moods. What we're really talking about here, of course, is not the mood of the market itself but the moods of the market participants.
Focus on trading one market exceptionally well rather than try to trade whatever's hot - that's how successful traders do it.
5. Their benchmark for success is anything but money
"Money changes everything." It sure does. We're all in this to make money. The trouble is, when traders use the amount of money they make to judge their own success, something happens to them - to all of us, really - that clouds our decision-making ability.
Successful traders have realised this and instead focus on other things to determine if they've had a successful day. Whether it be how well they were able to execute on their trading plan (see item #1), or their overall ability to predict short-term movements in the whatever they are trading, they know that if they do those things correctly, the money will follow.
Yes of course the money is important. Any trader who says otherwise is a fool. Why else would we put ourselves through this daily ride? However there is something about making it a secondary focus that allows the best traders to make better decisions.
The growing trading account simply becomes a nice result of making good decisions and trading the market well.
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