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Characteristics of Profitable Traders

  
  Education
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They are experienced – Probably the most horrifying and worst myth shot out to anyone considering trading for a living is that you will compound millions in an extremely short amount of time. The only true way to make every day profitable comes through experience, and countless hours learning is crucial to longevity of success.

They know the damage they are capable of – Notice I didn’t say potential or profits here. The best traders I know of understand their limits, and seem to focus more on what can go wrong than what can go right. They are not easily convinced of lucrative outcomes, and have a very high sense of self-awareness.

They trade to make money, not to be right – They understand the strengths and possible pitfalls of what it is they do for a living, and use that knowledge to curb their emotional output.

They have an edge and know how to use it – They understand that without it they wouldn’t last long

They have a gameplan, and follow it explicitly – Each trade is planned and opportunities are scouted for before any trading takes place. They steer away from the killer of all killers: overtrading.

They manage risk – Regardless of how much conviction they have on a trade, they will still do what they can to avoid the potential of any losses and understand rule #1 about trading: anything can happen.

They work obsessively – They follow each turn, each piece of info that comes out in regards to their trade, and follow any underlying information relevant to failure or success.

They only access the best information – Information rules in trading, and having some of the best translates to money. Using the wrong information leads to failure.

They think about the trade, not the money behind it – Focusing on money can destroy your means to objectively assess the trade itself.

They are constantly learning – Just when you think you know it all about trading, a new curveball gets thrown your way, not to mention there are continued means and methods to be learned about making money. Even the most highly successful trader I ever knew, a multi-billion dollar portfolio manager, has a team of fundamentalists and technicians come in to train and retrain himself and his traders.

They are active – Activity sparks creativity, a very crucial part of trading.

They have patience – They understand that the money will come, but everything needs to be in place, first.

Applying Sun Tzu's Art of War to Trading

  
  Education
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Sun Tzu’s Art of War is a classic piece of work that is widely read and applied to many fields, due to it’s fundamental nature that is highly adaptable to many areas of our lives. In this post, I extracted parts of the work and applied to trading and in doing so, hope to introduce the important trading concepts to you. I have also group and categorize them for easy understanding.

To put it in the context of trading, I have rationalised the following terms:
– General = You, the trader
– Battle = Trading the market/making a trade
– Men, Soldiers = Your capital, dollars!

ON WINNING IN THE MARKET

“Now the general who wins a battle makes many calculations in his temple ere the battle is fought. The general who loses a battle makes but few calculations beforehand. Thus do many calculations lead to victory, and few calculations to defeat: how much more no calculation at all! It is by attention to this point that I can foresee who is likely to win or lose.”

Calculations are to be made prior to any trade. What is the risk-reward ratio? What is the stop loss level and the amount that I am willing to lose? What is the size of position to take? How much leverage can I take? If the price moves to $XXX, what action should I take? What is my price objective? What is the proabability of winning? These are just questions that need to be answered and determined BEFORE a trade is made. THE BATTLE/TRADE IS WON BEFORE IT IS FOUGHT/MADE.

“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat.
If you know neither the enemy nor yourself, you will succumb in every battle.” (more…)

3 Mistakes

  
  Education
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1) Becoming Overly Focused on P/L During Trading – Watching your profits or losses tick up and down during a trade; becoming anxious about P/L and letting P/L, not a trading plan, dictate when you get out of a trade. It’s a recipe for performance anxiety. By focusing on process goals rather than P/L, you can stay grounded in good trading practices and minimize performance stresses.
2) Trading Much Larger After a Series of Winning Trades – It is common that traders become overconfident after a series of wins and decide to increase their risk by a factor of two or more. This often leads to large losing trades that wipe out much of the profit, generating frustation and discouragement. Just as it doesn’t make sense to plow into a trade after a large move has already occurred, it doesn’t make sense to plow into risk after a series of profitable trades.
3) Failing to Learn From Losing Trades – Traders often want to put losses behind them and not dwell on negatives. The downside is that they don’t learn from their losses and thus miss opportunities to understand what’s happening in markets and what they might be doing wrong. This is especially important following a series of losing trades: either you’re not seeing the markets well, or you’re not acting well on your perceptions. Both scenarios offer learning opportunities that can help generate profits down the line.
It’s common to think of trading as a stressful occupation, but much of the stress is self-generated. By staying focused on “best practices” in trading, we minimize fear and frustration and build confidence in our development.

Responsible Choice for Traders

  
  Education
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Responsibility as a trader means a lot of different things. As a psychologist, I like to talk about being “responsible” for ones’ owns emotions – identifying and accepting them, and being responsible for our decisions. Too many traders blame the market or some unseen force that manipulates the market and causes their loss. Whether or not such unseen forces exist isn’t really the issue, or even the reason that keeps traders from making money. It’s a convenient excuse, but not much else.

A useful concept for traders is a concept known as Responsible Choice, defined as choices that create consequences for which you are willing to assume full responsibility. The phrase, “responsible choice” comes from Gary Zukav, a man who has covered a lot of ground in his life; former Special Forces officer in Vietnam, Harvard grad, wrote the best selling physics book, “The Dancing Wu Li Masters”, and now a consciousness expert.  A friend of mine is very good friends with him.

Fully accepting whatever happens in a well-planned trade is the hallmark of a successful trader. A trader with a mind-set that operates with the concept of responsible choice will see loss simply as an unproductive trade, not as a personal attack.  Moreover, they will see the loss as a learning opportunity, gathering market information from the loss and possibly adjusting their perspective on the market.

Using the framework of responsible choice, a trading loss is actually empowering.  If a trader has difficulty accepting losses, or accepting whatever happens (e.g. not reaching target or overshooting target after the trade is closed) the psychological experience of empowerment is elusive and the trader will usually swing to the other side of the spectrum and become frustrated. Obviously, there is a lot more to be said about losses, I just wanted to point out the concept of responsible choice as a framework to be considered.

Questions after the hit

  
  Education
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When you take a hit, you have got to think your way through it logically.

Questions to ask yourself when you have taken a hit.

What is the lesson here???

What did I learn????

How can I avoid this next time????

What is my strategy the next time I encounter this situation????

Did I remember to pat myself on the back for the good trades this month?????

Did I remind myself that I have had many more successes this month??????

Did I remind myself that this is just an opportunity to do it better next time?????

Did I use proper discipline????????

Did I wait for a proper trade set-up??????

Did I follow my trading rules????????

How long am I going to wallow here???????

Did I remind myself that the market is very generous and will always give me plenty of opportunities for profit???????

Do I have more money now than I did at the beginning of the month???? (more…)

Hope

  
  Education
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When the ship starts to sink, don’t pray. Jump.

Learning to take losses is an essential speculative technique. MOST never learn it. Take losses at once and move on. Take small losses to protect yourself from the big ones.
Beware the 3 obstacles to jumping ship:
– fear of regret ( that the loser will turn out to be a winner when you’ve bailed-out )
– Unwillingness to abandon part of an investment ( become willing to abandon )
– Difficulty of admitting you made a mistake.

Three Essential Components Of Trading

  
  Education
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number-3Every winner needs three essential components of trading: a sound individual psychology, a logical trading system and a good money management.

These essentials are three legs of a stool – remove one and the stool will fall together with the person who sits on it.

Losers try to build a stool with only one leg, or two at the most. They usually focus exclusively on trading systems.

Your trade must be based on clearly defined rules.
You have to analyze your feelings as you trade, to make sure that your decisions are intellectually sound.
You have to structure your money management so that no string of losses can kick you out of the game.

Three Main Areas of Trading You Must Master

  
  Education
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  1. Psychology: Trading is a miserable experience if your very self worth hangs on your every trade. You must separate your ego from your trading, you do not want wins to make you too happy or losses too make you depressed. In trading you are a business man, you are using capital to create more capital. When you lose money on a trade it has nothing to do with you if you followed your trading plan, the market was simply not conducive to a profit with your system, nothing more, it isn’t personal. Separate your ego from your trading.
  2. Risk Management: If you want to be successful in trading you have to avoid the risk of ruin. If you risk 2% of your trading capital per trade and you lose ten times in a row then you are down 20%, you need a 25% return to get back to even, you can do that. If you risk 10% of your capital per trade and lose ten times in a row you are at $0 and ruined. If you trade long enough you will have ten losses in a row, plan to stay in business after this happens. Carefully control what you lose.
  3. Method: You need to trade a method that fits your personality and is proven to win over the long term. Some people love to trade growth stocks, they need to find a method that is a proven winner and trade it. They will need to quantify what can be on their watch list, position size of each trade, and define entries and exits along with initial stop losses. Most importantly stick with the system so they will be trading it when it wins big. Each trader has to find the market they want to specialize in and become an expert. Before trading a system they need to look at the systems historical performance with some form of back testing. Find a winning method that fits your personality and trade it and it alone.

On Losses (and Profits).

  
  Education
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  • ‘Tradings only real secret is… The best loser is the long-term winner’ – Phantom
  • “Trading is a losing game, the best loser is the long-term winner” – Anonymous.
  • ‘Losses can either be lost money, or tuition in the school of trading’ – Courtesy of Mark Moskowitz.
  • ‘The worst advice I use to get was. – ‘No one went broke taking a profit’’. – Courtesy of John Berra.
  • “It seems that the necessary thing to do is not to fear mistakes, to plunge in, to do the best that one can, hoping to learn enough from blunders to correct them eventually.” – Abraham Maslow
  • ‘“Learn to like your losses”. Why? Because they are small!’ – Courtesy of Stuart A.Brown.
  • “One common adage…that is completely wrongheaded is: You can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits.” – William Eckhardt.
  • “Its not about being right or wrong, rather, its about how much money you make when you’re right and how much you don’t lose when you’re wrong.” – George Soros.
  • “The first loss is the best loss.” – Jim Rogers.
  • “Losers average Losers”…Paul Tudor Jones.
  • “You learn nothing from your winners and everything from your losers.” – Courtesy of Jeff Horn.
  • ·“To become a Master Trader, you must first be a successful loser.” – Jeff Horn.

Seven Insights for Disciplined Trading

  
  Education
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I’ve always been a fan of Mark Douglas’ work, as my copy of his initial book on trading psychology, The Disciplined Trader, is thoroughly marked up thanks to Douglas’ many innovative ideas about mastering the internal challenges we all face with trading.  His newest book, Trading in the Zone, is full of more great insights. I recently finished reading his excellent follow-up work, and it sparked my review of key points I take out of Douglas’ ground-breaking insights:

1) Develop consistency.  Douglas focuses on how we can create a mindset of consistency by developing beliefs which support us in obtaining this result.  In order to develop consistency, Douglas emphasizes beliefs such as objectively identifying your edges, defining the risk in each trade in advance, accepting the risk to be able to exit a position when a defined loss level is realized, and many other key mindsets that help traders work through the issues they face in taking a trade, making the trade and executing their exit from the trade.

2) Trading is a probability game.  You can’t be a perfectionist and expect to be a great trader. Your losses (that you hope will return to breakeven) will kill you.

3) Jumping in too soon or getting in too late.  These mistakes come from traders not having a well-defined plan of how they will enter the market.  This positions the trader as a reactive trader instead of a proactive trader, which increase the level of emotion the trader will feel in reacting to market movements.  A written plan helps make a trader more systematic and objective, and reduces the risk that emotions will cause the trader to deviate from his plan.

4) Not taking profits on winners and letting winners turn to losers.  Again this is a function of not having a properly thought-out plan.  Entries are easy but exits are hard.  You must have a plan for how you will exit the market, both on your winners and your losers.  Then your job as a trader becomes to execute your plan precisely.

5) Great traders don’t place their own expectations on to the market’s behavior.  Poor traders expect the market to give them something.  When conditions change, a smart trader will recognize that, and take what the market gives. 

6) Emotional pain comes from expectations not being realized.  When you expect something, and it doesn’t deliver as expected, what occurs? Disappointment.  By not having expectations of the market, you are not setting yourself up for this inner turmoil.  Douglas states that the market doesn’t generate pain or pleasure inherently; the market only generates upticks and downticks.  It is how we perceive and respond to these upticks and downticks that determine how we feel.  This perception and feeling is a function of our beliefs.  If you’re still feeling pain when taking a loss according to your plan, you are still experiencing a belief that your loss is somehow a negative reflection on you personally. 

7) The Four Major Fears – fear of losing money, being wrong, missing out, leaving money on the table.  All of these fears result from thinking you know what will happen next. Your trading plan must approach trading as a probabilities game, where you know in advance you will win some and lose some, but that the odds will be in your favor over time.  If you approach trading thinking that you can’t take a loss, then take three losses in a row (which is to be expected in most trading methods), you will be emotionally devastated and will give up on your plan.

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