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3 Characteristics of Great Traders

  
  Education
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MEN1. 10,000 hours

In his recent book Outliers: The Story of Success, Malcolm Gladwell describes the 10,000-Hour Rule, claiming that the key to success in any cognitively complex field is, to a large extent, a matter of practicing a specific task for a total of around 10,000 hours. 10,000 hours equates to around 4hrs a day for 10 years. For some reason most people that ‘try their hand’ at trading view it as a get rich quick scheme. That in a very short space of time, they will be able to turn $500 into $1 million! It is precisely this mindset that has resulted in the current economic mess, a bunch of 20-somethings being handed the red phone for financial weapons of mass destruction. The greatest traders understand that trading much like being a doctor, engineer or any other focused and technical endeavor requires time to develop and hone the skill set. Now you wouldn’t see a doctor performing open heart surgery after 3 months on a surgery simulator. Why would trading as a technical undertaking require less time?

 Trading success, comes from screen time and experience, you have to put the hours in!

2. Education, education, education.

The old cliche touted by politicians when they can’t think of anything clever to say to their audience. The importance of education to success in trading cannot be placed on a high enough pedestal. You have to learn to earn, the best traders work obsessively to refine their edge further to stay ahead of the curve.

3. Adapt or Die.

Market conditions change and technology advances, thus the conditions for trading are always evolving, the rise in mechanical trading is testament to that. The very best traders through a process of education and adaptation are constantly staying ahead of the curve and creating ever new and ingenious methods to profit from the markets evolution.

Trading Thoughts

  
  Education
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The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day — and you lose more than you should had you not listened to hope — to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out — to soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.

When you’re in a losing streak, your ability to properly assimilate and analyze information starts to become distorted because of the impairment of the confidence factor, which is a by-product of a losing streak. You have to work very hard to restore that confidence, and cutting back trading size helps achieve that goal.

When I get hurt in the market, I get the hell out. It doesn’t matter at all where the market is trading. I just get out, because I believe that once you’re hurt in the market, your decisions are going to be far less objective than they are when you’re doing well. If you stick around when the market is severely against you, sooner or later they are going to carry you out.

The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading… I know this will sound like a cliche, but the single most important reason that people lose money in the financial markets is that they don’t cut their losses short.”

If you don’t learn from your losses who will?

  
  Education
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If you don’t try you don’t fail, if you don’t fail you don’t learn, if you don’t learn you don’t grow” – Om Malik

Failure is an inherent part of trading. No trader can get every trade correct. One of the lessons in the new Jack Schwager book, Hedge Fund Market Wizards, is that “Don’t try to be 100% right.” In fact the pursuit of perfection in trading will likely lead to catastrophic results. That is why some perspective on failure and loss is a key to staying in the trading game.

Atul Gawande, a surgeon and writer, has an interesting piece up at the New Yorker which is a transcript of a commencement speech he recently gave at Williams College.* Although he is discussing medicine his perspective on failure is worth contemplating. Here is a quote:

So you will take risks, and you will have failures. But it’s what happens afterward that is defining. A failure often does not have to be a failure at all. However, you have to be ready for it—will you admit when things go wrong? Will you take steps to set them right?—because the difference between triumph and defeat, you’ll find, isn’t about willingness to take risks. It’s about mastery of rescue.

It is a bit of cliche to say that your trading losses represent tuition paid. If you don’t learn from your own failures no one will. Those losses will then be not just a financial loss but a lost opportunity as well.

Cut your losses short, no questions asked

  
  Education
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The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.”

William O’Neil

The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading… I know this will sound like a cliche, but the single most important reason that people lose money in the financial markets is that they don’t cut their losses short.”

Victor Sperandeo

Some people say, “I can’t sell that stock because I’d be taking a loss.” If the stock is below the price you paid for it, selling doesn’t give you a loss; you already have it.

William O’Neil

When I became a winner I went from ‘I figured it out, therefore it can’t be wrong’ to ‘I figured it out, but if I’m wrong, I’m getting the hell out, because I want to save my money and go on to the next trade.’”

Marty Schwartz

Cut your losses short, no questions asked

  
  Education
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The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.”

William O’Neil

The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading… I know this will sound like a cliche, but the single most important reason that people lose money in the financial markets is that they don’t cut their losses short.”

Victor Sperandeo

Some people say, “I can’t sell that stock because I’d be taking a loss.” If the stock is below the price you paid for it, selling doesn’t give you a loss; you already have it.

William O’Neil

When I became a winner I went from ‘I figured it out, therefore it can’t be wrong’ to ‘I figured it out, but if I’m wrong, I’m getting the hell out, because I want to save my money and go on to the next trade.’”

Marty Schwartz

"Ten Steps to Wealth and Happiness For Traders "

  
  Education
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1. Have a Plan: If you are going to actively trade, you must have a comprehensive plan. All too many investors I deal with have no strategy at all — its strictly seat of the pants reaction to each and every market twitch. The old cliche “If you fail to plan, than you plan to fail” is absolutely true.

I suggest that traders write up a business plan for their strategy, as if they were asking Venture Capitalists for money for a start up; In fact, you are asking an investor for capital — just because that investor is someone you know a long time (you) doesn’t mean you should skip the planning stages.

2. Expect to be Wrong: Accept this fact: You will be wrong, and often. The plea for help is at least a tacit recognition that you are doing something wrong — and that means you are a giant leap ahead of many failing traders.

Egotists who refuse to recognize the simple truism of being wrong often give up unacceptable amounts of capital. It is only stubborn pride — and lack of risk management — that keeps people in stocks down 50% or more.

Even the best stock pickers in the world are wrong about half the time.

Michael Jordan has the best quote on the subject: “I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty-six times, I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”

Mike is the greatest player of all times not merely because of his superb physical skills: He understands the nature of failure — and its importance — and places it within a larger framework of the game

3. Predetermine Stops Before Opening Any Position: Once you have come to understand that you will be frequently wrong, it becomes much easier to use stops and sell targets.

I suggest signing a “prenuptial agreement” with every stock you participate in: When it hits a predetermined point, regardless of methodology — below support or a moving average or a specific percentage amount or the monthly low or whatever your stop loss method is — that’s it, you’re out, end of story. No hopin’ or wishin’ or prayin’ or . . . (Apologies to Dusty Springfield)

The prenup means you are making the exit decision before you are in a trade, and when you are neutral and objective. (more…)

The agony of waiting

  
Economy, Education
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Alex Stone in the New York Times recently had an interesting article up on the psychology of waiting in line. He notes how Americans spend 37 billion hours a year waiting in line and how it exacts a psychological toll on all of us. Traders are in a very real sense waiting in line for trades that meet their criteria for valid setups. It should not be surprising then that traders have a tendency to jump the gun looking for things to do to relieve the stress of waiting for viable trades. Stone writes why it is we as consumers are vulnerable to distractions from our waits:

The drudgery of unoccupied time also accounts in large measure for the popularity of impulse-buy items, which earn supermarkets about $5.5 billion annually. The tabloids and packs of gum offer relief from the agony of waiting.
Our expectations further affect how we feel about lines. Uncertainty magnifies the stress of waiting, while feedback in the form of expected wait times and explanations for delays improves the tenor of the experience.

Unfortunately traders don’t know what the “expected wait times” will be for their next trade. The ongoing challenge for traders is to avoid impulsive actions that don’t fit with established trading checklists. Brett Steenbarger in a vintage post from TraderFeed walks through an example of how he was jumping ahead of certain trades and paying the price for them. He was able to turn things around but he notes how even experienced traders are still a work in progress.

It is a bit of cliche to say that traders need have patience and discipline. A better understanding of the psychology of waiting can help keep traders a bit more grounded while they wait for better opportunities down the road. As for your wait at the DMV that is a whole other issue entirely.

7 Characteristics of Great Traders

  
  Education
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1. Education, education, education.

The old cliche touted by politicians when they can’t think of anything clever to say to their audience. The importance of education to success in trading cannot be placed on a high enough pedestal. You have to learn to earn, the best traders work obsessively to refine their edge further to stay ahead of the curve.

2. Adapt or Die.

Market conditions change and technology advances, thus the conditions for trading are always evolving, the rise in mechanical trading is testament to that. The very best traders through a process of education and adaptation are constantly staying ahead of the curve and creating ever new and ingenious methods to profit from the markets evolution.

3. Fail to plan, you plan to fail.

The best traders have a well documented plan; they know exactly what they are looking for and follow that plan to the letter. Their preparation for a trade starts long before the market open, it is this meticulous planning and importantly adherence to that plan that helps them avoid the biggest demons for any trader, over trading and revenge trading.

4. “Be like Machine”

As human beings emotions pay a key role in our existence, for a trader emotions can be a source of great pain. Trading psychology and the management of your emotions in a trade play a key role in overall success. Fear and greed can cut your winners short and let your losers run. Dealing with emotions follows on from your plan; the more robust your plan the less likely you are to fall into the emotional mine field. (more…)

Cut your losses short, no questions asked

  
  Education
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The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.”

William O’Neil

The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading… I know this will sound like a cliche, but the single most important reason that people lose money in the financial markets is that they don’t cut their losses short.”

Victor Sperandeo

Some people say, “I can’t sell that stock because I’d be taking a loss.” If the stock is below the price you paid for it, selling doesn’t give you a loss; you already have it.

William O’Neil

When I became a winner I went from ‘I figured it out, therefore it can’t be wrong’ to ‘I figured it out, but if I’m wrong, I’m getting the hell out, because I want to save my money and go on to the next trade.’”

Marty Schwartz

Control

  
  Education
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Control-Stocks rise when they are being bought up. Stocks fall when they are being sold off. I always ask myself “Who is in control. The buyers or sellers.” Control changes often and in different time frames you can argue that one party or the other were merely taking a rest.
I generally buy stocks that are going up and short sell stocks that are falling. But I also play the sharp reversals that happen if there is a huge gain or drop as I know gravity will take effect and profit taking will occur. The smart way to day trade is to be on the winning side be it buyers or sellers.
As a small fish in a big ocean I can only ride on the coattails of the big boys who actually move the market. My job as a trader is to recognize when trend or momentum is starting to kick in and climb aboard. Short term trends or momentum are the only thing that I trade. The old cliche’ “the trend is your friend” is so very true.
I only trade in the direction the chart is telling me to. Maybe you can watch the talking heads on TV blathering on or read about how great some stock is without forming an opinion on it. I can’t, so it’s safer to insulate myself from any and all information. I actually don’t care what, where, why, how or when a company does what it does. Who am I to be able to process all this information? I do know that when a stock is rising, more people are buying it than selling it and vice versa. Seems easier to me to only look at and believe the chart and trade accordingly. If I have preconceived notions about what the stock may do, I will not be able to cut my losses when the chart tells me to. I will hold on to the dream all the way to the poor house. Always trade with the trend.
Cutting your losers is one of the most important aspects of trading.Unless you have an unlimited pile of money to fritter away you must admit you’re wrong and exit the trade. If you don’t you will not have enough to remain in the game. End of story.
Letting the winners run is also important. They are winners after all and that is all that counts. Adding size (buying more shares) can turn little winners into big winners.
If you disregard any or all of these 3 simple rules you won’t be around trading very long.

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