1. There is no Single True Path for succeeding in the markets
The methods employed by great traders are extraordinarily diverse. Some are pure fundamentalists; others use only technical analysis; and still others combine the two methodologies. Some traders consider two days to be long-term, while others considers two months to be short-term. Some are highly quantitative, while others rely primarily on qualitative market decision.
2. The Universal Trait
One trait that was shared by all the traders is discipline.
Successful trading is essentially a two-stage process:
a. Develop an effective trading strategy and an accompanying trading plan that addresses all contingencies.
b. Follow the pan without exception. No matter how sound the trading strategy, its success will depend on this execution phase, which requires absolute discipline.
3. You Have to Trade Your Personality
It is critical to trade a style that matches your personality. There is no single right way to trade the markets; you have to know who you are. Successful traders invariably gravitate to an approach that fits their personality. Trading is not a one-size-fits-all proposition; each trader must tailor an individual approach
4. Failure and Perseverance
Although some of the traders in this book were successful from the start, the early market experiences of others were marked by complete failure. Despite their horrendous beginnings, these traders ultimately went on to spectacular success. How were they able to achieve such a complete metamorphosis? Of course, part of the answer is that they had the inner strength not to be defeated by defeat. But tenacity without flexibility is no virtue. Had they continued to do what they had been doing before, they wold have experiences the same results. The key is that they completely changed what they were doing.
5. Great Traders Are Marked by Their FlexibilityEven great traders sometimes have completely wrongheaded ideas when they start. They ultimately succeed, however, because they have the flexibility to change their approach.
Market are dynamic. Approaches that work in one period may cease to work in another. Success in the markets requires the ability to adapt to changing and altered realities.
6. It requires Time to Become a Successful Trader
Experience is a minimum requirement for success in trading, just as it is in any other profession, and experience can be acquired only in real time.
7. Keep a record of Your Market Observations
Although the process of gaining experience can't be rushed, it can be made much more efficient by writing down market observations instead of depending on memory.
8. Develop a Trading Philosophy
Develop a specif trading philosophy - an integration of market concepts and trading methods - that is based on your market experience and is consistent with your personality (item 3). Developing a trading philosophy is a dynamic process - as you gather more experience and knowledge, the existing philosophy should be revised accordingly.
9. What is your Edge?
Unless you can answer this question clearly and decisively, you are not ready to trade. Every trader in this book has a specific edge.
10. The Confidence Chicken-and-Egg Question
One of the strikingly evident traits among all the Market Wizards is their high level of confidence. Any hesitation in the answer should be viewed as a cautionary flag.
11. Hard Work
The irony is that so many people are drawn to the markets because it seems like an easy way to make a lot of money, yet those who excel tend to be extraordinarily hard workers - almost to a fault.
There is often a fine line between hard work and obsession, a line that is frequently crossed by the Market Wizards. It may well be that a tendency toward obsessiveness in respect to the markets, and often other endeavors as well, is simply a trait associated with success.
13. The Market Wizards Tend to Be Innovators, Not Followers
14. To Be a Winner You Have to Be Willing to Take a Loss
The people who are successful in this business are the people who are willing to lose money.
15. Risk Control
a. Stop-Loss points - This approach allows them to limit the potential loss on any position to a well-defined risk level.
b. Reduce the position - "If you think you're wrong, or if the market is moving against you and you don't know why, take in half. You can always put it on again. If you do that twice, you've taken in three-quarters of your position. Then what's left is no longer a big deal."
c. Selecting low-risk positions - Some traders reply on very restrictive stock selection conditions to control risk as an alternative to stop-loss liquidation or position reduction.
d. Limiting the initial position size - "A common mistake trader make is that they take on too big of a position relative to their portfolio. Then when the stock moves against them, the pain becomes too great to handle, and they end up panicking or freezing."
"Never make a bet you can't afford to lose"
e. Diversification - The more diversified the holdings, the lower the risk. Diversification by itself, however, is not a sufficient risk-control measure, because of the significant correlation of most stocks to the broader market and hence to each other. Also, too much diversification can have significant drawbacks.
f. Short-selling - Although the common perception is that short-selling is risky, it can actually be an efficient tool for reducing portfolio risk
g. Hedge Strategies - Some traders use methodologies in which positions are hedged from the onset. For these traders, risk control is a matter of restricting leverage, since even a low-risk strategy can become a high-risk trade if the leverage is excessive.