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Difference between Skill & Luck in Trading

  
  Education
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Many times, good traders make the right trade but still lose, but it is okay because they will win in the long term because their method is tested, their risk is managed, and their mind set is right for long term trading success. They have developed the skills of a successful trader. Other times a new trader with no skills makes a trade based on a hunch and wins big, the danger is that the new trader will confuse luck with skill. The delusion begins with winning on a few trades, the new trader trades bigger, and bigger, until their luck runs out and they are wiped out. We need to all keep a good understanding of whether we traded will the right skill set or we just got lucky.

Traders with skill have large gains after 100 trades and are relatively quiet, traders that were lucky have huge gains after a few trades and are very loud, then very quiet for the next few trades that usually bring their account to zero.

Traders with skill risk 1% to 2% of their trading capital per trade and win in the long term, traders that are just lucky risk the majority of their account for a few big wins in the short term but lose in the long term when their luck runs out.
Traders with skill use a successful method with different stocks, currencies, commodities, future markets while traders with just luck are only successful with one lucky pick in one of those markets and when its up trend ends their winning streak ends. (more…)

3 Elements of Trading Success

  
  Education
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What all winning traders must have, regardless of timeframe and system are as follows:

Trading System

  • They trade a robust system or method that wins more money over time than it loses.
  • Their system gives them a reward to risk ratio that is in their favor.
  • Their system or method is proven to work with a live trading record over many markets, trades, or has  historical back testing.

Trading with Managed Risk

  • They manage the risk of ruin to avoid blowing up their account.
  • They risk no more than 1%-2% of total account equity on any one trade.
  • They manage risk through proper position size so they do not risk their account and their ability to trade in the future.
  • They do not risk more than 6%-12% of their capital at one time, across multiple trades.

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12 Trading Expectations

  
  Education
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  1. No trader wins on every trade. The best traders in the world only have a 50%-80% success rate. 
  2. Trying to get rich quick requires so much risk, that the probabilities of ending up poor is far greater than your chances of becoming rich. 
  3. Consistent 15% – 20% annual returns are what world class traders and portfolio managers make.
  4. Some of the best traders’ best years were 50% – 100% annual returns, in specific market conditions, that were conducive to their strategy.
  5. Market conditions will have a huge impact on your returns each year, regardless of how you trade.
  6. The higher returns you aim for, the more risk will be required, and the larger draw down you will have getting those returns. 
  7. If you risk 5% t0 10% of your trading capital on every trade, your risk of ruin is 100% in the long term.
  8. If you think that the above percentages are just too small, then it is very likely that your trading account is too small to make those percentages meaningful.
  9. To trade for a living, you likely need a multiple six figure account, and a minimum of one years worth of living expenses to avoid the unrealistic expectations of small returns and the accompanying stress.
  10. Trading is a profession like any other, and requires the same level of discipline and dedication to be successful.
  11. All your profits comes from other trader’s losses. You must beat other traders to be profitable.
  12. Trading is the hardest easy money you will ever make.

14 Emotions of Traders-Really Dangerous

  
  Education
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  1. Anger- Revenge trading
  2. Fear- Inability to take an entry or hold a winner in a trend.
  3. Disgust- Can lead to loss of a traders confidence.
  4. Happiness- Surprisingly can lead to trading too big and taking on too many positions.
  5. Sadness- Can lead to having difficulty taking the next trade entry or cutting a loss.
  6. Surprise- Can many times lead to making decisions based on emotions and abandoning a trading plan.
  7. Neutral- Trading is a lot of work and only passion and energy can move you toward doing the required homework that leads to eventual success.
  8. Anxiety- Can lead to exhaustion due to excessive stress.
  9. Love- If you truly love trading the markets then only time separates you from success. If you love the wrong things or people it can be destructive.
  10. Depression- Leads to abandoning your trading.
  11. Contempt- Having contempt for the markets or other traders will result in bias and bad decision making.
  12. Pride- Leads to trading too big, not cutting losses fast enough, and wanting to be right and prove something more than being a rational trader.
  13. Shame- Makes it difficult to talk to others about your trading and look at your account capital due to your bad decisions.
  14. Envy- Leads to external focus instead of the internal focus needed to trade successfully.
  15. Trading is only successful long term when it is done with the mind,  emotions are only valuable if they create the energy in you to get you where you truly want to be. Emotions are positive if they protect our psychological boundaries, not so great if they just support an out of control ego. Emotions are great tools at times but terrible masters.

Mindset of a winner -5 Quotes

  
  Education
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– A losing trader can do little to transform himself into a winning trader. A losing trader is not going to want to transform himself. That’s the kind of thing winning traders do.

– The winning traders have usually been winning at whatever field they are in for years.

 -It is a happy circumstance that when nature gives us true burning desires, she also gives us the means to satisfy them. Those who want to win and lack skill can get someone with skill to help them.

– The “doing” part of trading is simple. You just pick up the phone and place orders. The “being” part is a bit more subtle. It’s like being an athlete. It’s commitment arid mission. To the committed, a world of support appears. All manner of unforeseen assistance materializes to support and propel the committed to meet grand destiny.

– In your recipe for success, don’t forget commitment – and a deep belief in the inevitability of your success.

10 Bad Habits of Trader

  
  Education
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  1. They  trade too much. The edge that small traders have over institutions, is that they can pick trades carefully and only trade the best trends and entries. The less they trade, the more money they make, because being picky gives traders an edge.
  2. Unprofitable traders tend to be trend fighters, always wanting to try to call tops and bottoms. They eventually will be right, but their account will likely be too small by then to really profit from the reversal. Money is made by going with the flow of the river, not paddling upstream against it.
  3. Taking small profits quickly and letting losing trades run in the hopes of a bounce back, is a sure path to failure. Profitable traders understand their risk/reward ratio; big wins and small losses. Being quick to take profits while allowing losses to grow, is a sure way to blow up your trading account.
  4. Wanting to be right more than wanting to make money will be a very expensive lesson. A trader who doesn’t  want to take losses will most certainly balk at reversing his position because it signifies personal failure. A profitable trader is not afraid to get on the right side of the market to start making money.
  5. Unprofitable traders trade too big, and risk too much to make too little. The biggest key to profitability is to avoid big losses. Your wins can be as big as you like, but the losses must be limited.
  6. Unprofitable traders watch BLUE CHANNELS for trading ideas.
  7. Unprofitable traders want stock picks, while profitable traders want to develop trading plans and systems.
  8. Unprofitable traders think trading is about being right. Profitable traders know that profitability is about admitting you are wrong quickly, and being right as long as possible.
  9. Unprofitable traders don’t do their homework because they think there is a quick and easy route to trading success.
  10. Unprofitable traders #1 question is how much they can make if they are right, while the profitable traders #1 concern is how much they can lose if wrong.

Five Trading Lessons From Market Wizard Dr. Van. K. Tharp

  
  Education
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The composite profile of a losing trader would be someone who is highly stressed and has little protection from stress, has a negative outlook on life and expects the worst, has a lot of conflict in his/her personality, and blames others when things go wrong. Such a person would not have a set of rules to guide their behavior and would be more likely a crowd follower. In addition, losing traders tend to be disorganized and impatient.”

The profitable trader is able to manage stress, has a positive outlook on life and expects the best from themselves and their trading. They take responsibility for their wins and losses. They know who they are and are in touch with their goals. They have specific rules to guide their trading and are organized and patient.

“The simple truth is that most people are risk-aversive in the realm of profits – they prefer a sure, smaller gain to a wise gamble for a larger gain – and risk-seeking in the realm of losses – they prefer an unwise gamble to a sure loss. As a result, most people tend to do the opposite of what is required for success. They cut their profits short and let their losses run.”

Most traders are unprofitable because they take profits quickly but let losers run. Many traders can have a nice winning streak or be profitable in a bull market only to give back their profits with one big loss or lose all their bull market profits during the next bear market.

“Most people approach trading to make a lot of money, and that is one of the primary reasons they lose.” (more…)

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