Quasimodo goes to a doctor for his annual checkup. “I think some-
thing is wrong with your back,” the doctor says.
“What makes you say that?” asks Quasimodo.
“Oh,” replies the doctor… “just a hunch.”
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Many people have asked me over the years what it takes to be a successful trader. The answer is not clear but here are a few thoughts to ponder and apply.
First, you must have a complete commitment to trading and do it full-time. If it is a hobby or a secondary pass-time, I know how the bottom line will be - a big minus. Trading must be addressed as a profession because if you do not treat it as such, let me assure you, those who do treat it this way will separate you from your money very quickly.
Secondly, you must fit your trading habits to your individual personality. If you are an impulsive individual, your style will reflect more trading than a calculating individual who waits for all the indicators to fall into place. The personality factor more than any other factor I know of, will determine success or failure. If you are an emotional person, admit that you are and structure your trading habits to make emotions a positive influence, not a negative one. If you are either greedy or fearful, that will affect your decision making on a position and without recognizing the governing emotion, your decisions will tend to be wrong. Whenever I am the most fearful of the market, that emotion helps make me decide to go long and buy. I know that my emotions tend to make me fearful most of the time. Whenever my fears become overwhelming, my discipline tells me to buy and discipline must win out or you are doomed to failure.
The work ethic can never be overstated. I watch the market all day long from the opening bell to the closing bell. I have kept diaries on every day in the market for the last seven years, sometimes having over 40 entries in my diary per day. If I do not do my work my profit suffers. There is no short cut in trading, the market will quickly find if you are lazy.
Planning is the objective part of trading. Start with the worst case scenario and work from there. You will never be more objective than before you execute a trade. Once you are in a trade, emotions take over so the plan must be in place before the activity takes place. Determine a plan that tells you when you are wrong and admit it. Get out, retreat, live to fight another day; these are cowardly approaches but it will keep you from the trader’s obituary. Incidentally, I have been diagnosed as terminal many times and believe each rehabilitation takes a long time, but death is final.
Turn you weaknesses into strength. Happy trading.
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Taking a loss is difficult. Many times, unfortunately, traders get to a point where they aren’t only losing their money, but also their objectivity. When they get to this point, however, it’s vital to regain their composure, and take a good, hard look at their options. It’s difficult to stay calm and objective when you have lost a great deal of capital. All you can think about is getting it back or wishing it had never happened. But it’s vital to remember that you aren’t powerless over your emotions. There are a number of things you can do to restore control.
(1) First, look at your assumptions about losses. Many novice traders strive for perfection in a field where losses and setbacks are commonplace. At every setback or loss, they think, “How could I have been so stupid, so incompetent?” This isn’t a very adaptive mindset while trading chaotic and volatile markets. You should go into trading expecting to make many more losses than wins. But that’s all right. You can end up profitable in the long run even when less than 50% of your trades are losers. Remembering this fact of trading can help you maintain your composure.
(2) Second, it’s vital to limit your risk and trade with money that you can afford to lose. It may seem like a say this over and over, but it’s essential to remember this fact. It may be desirable to be able to trade with “scared money” but it’s like believing you can jump out of a hotel room window and land in the pool. It can happen, but why take the risk? If you know deep down that you can survive a loss, you will stay calm even during the midst of a losing trade. But if you are trading with money you cannot afford to lose, you will naturally feel afraid. Never underestimate the value of risk management.
(3) Third, if circumstances are so overwhelming that you cannot think clearly, you might want to think about closing out a trade even when it’s going your way. These days, commissions are low enough that you can easily close out your positions, evaluate them, and contemplate your options. The relatively low commission costs are worth it when you consider the peace of mind it buys. You’ll find that once your money is no longer at risk, you’ll calm down and look at your trades more objectively.
Trading is indeed a stressful business. There’s pressure to do well, and the need to do well can interfere with your ability to cultivate the calm, winning mindset needed for financial success. But by staying optimistic and managing your risk, you can remain objective, free, and creative. And when you reach this state of being, you’ll increase your chances of trading with the proper mental edge.
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Even if you are on the right track, you will get run over if you just sit
there.
Will Rogers
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A husband and wife are cooing over their new born baby. “Look at the
size of his pecker,” says the man. “It’s massive!”
“Yes dear,” says the wife. “But at least he’s got your ears.”
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A man takes his seat in the cinema, but he is too far from the screen.
He whispers to the usher, “This is a mystery, and I have to watch a mystery
close up. Get me a better seat, and I’ll give you a handsome tip.”
The usher moves him into the second row, and the man rewards him with a a 20cts coin.
The usher looks at his tip for a second and then leans over to whisper to
the man, “The wife did it.”
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Little Pauly’s family who had just moved into a new neighbourhood and
was anxious to make a good impression. But the neighbours seemed cold
and made no overtures of welcome. Pauly’s mother was overjoyed when
finally Pauly came in and announced happily, “Mommy, the lady down the
street asked my name today!”
Oh, how nice!” exclaimed the mother enthusiastically. “And then what
did she do?”
Pauly: “Then she gave it to the policeman.”
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There’s nothing more thrilling than anticipating the markets and making a huge profit off of a trade. Not only do you feel on top of the world for getting it right, but the feeling of security from realizing a windfall is nice too. After a winning streak, it’s tempting to let lose and start making some big trades. Although it is often useful to take advantage of a hot streak when you hit upon one, it doesn’t mean that you should act recklessly. It’s essential for long-term survival to maintain discipline and manage risk.
Managing risk is a trader’s secret weapon. Don’t take unnecessary chances. Trading is a game of survival. Sure, you must make big profits while you are running hot, but you must avoid mounting huge losses when you are running cold. Don’t be caught off guard. Consider every possibility. Continue to manage risk. It can go a long way in helping you stay profitable in the long run.
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