August 25, 2010

7 Habits Of A Highly Successful Trader (4 of 7)

4. Work Hard at Learning How to Trade Properly and Keep Working:

This is no different from any other trade. Would you expect to become a brain surgeon after attending a week-end seminar and reading a few books? Yet, why do so many people expect to become a Market Wizard within such a short period of time?

If you ever have the privilege to ask questions to a successful trader you'll realize just how much effort, time, determination and lost money it took until they arrived at where they are. Being a consistent stock market winner is no different from being a top lawyer, Doctor or businessman.

First you must decide that you really do want to trade. Ask your-self is trading the stock market something I am genuinely interested in or are you lured by the potential money it has to offer you? I always remember reading a book called " Grow Rich With Peace of Mind" Napolean Hill. Whilst interviewing the top people in a number of professions he came to the conclusion that these people loved their chosen fields. They would have done it for no money. Trading is the same. If your number one goal in trading the markets is simply to make as much money as possible then I doubt you'll make it into the super trader status. If you are simply chasing the money it can be a motivation as long as you are motivated to learn and work at what really works in the market and NOT keep chasing the latest hot new trading idea that exploits peoples love of money to make them act.

I am amazed at the number of traders who have not even read a number of very basic stock market books. It seems it is too much effort for them to read a book and learn some basic principles. Yet, these people will blow a $10,000 account in less than 6 months chasing the pipe dream. Get real! Successful trading requires not only a lot of ground work but on-going effort in order to keep at the very top of your game.

In market wizards' I and II you will find that ,all but one trader, went through years of trial and error, not to mention huge amounts of effort until they became consistent, successful traders. Why should it be any different for us? Are we saying we are better than they are? Make no mistake, just like it takes many years of intense studying to become a top lawyer, to become a top trader is no different. If you are new then don't expect to strike out and make 80%+ returns from the day you start. If you do then give me a call and I'll see what you have that no-one else has. Consider the first three years of your trading as going to University. The stock market is the teacher and your initial account are your fees ( so keep it small)

So, what does it mean to work hard at your trading? I have broken it down into two sections:

Firstly you will have to spend much time on analyzing your-self, your personality, find a trading style you are most comfortable with, learn how to trade properly, read, study, ask questions. Basically, you are going to have to start from scratch and build a system that fits you. It will take a couple of years at a minimum. If this sounds like too much effort GOOD. You have just saved your-self a lot of lost money. Forget trading and move on to something which genuinely interests you.

If doing the above ground works sounds good, and you can't wait to get started then may-be there is hope.

Once you have developed a trading system that fits you and you have the iron clad discipline to follow your plan then it is a constant battle to stay on top of your trading. As a trader you will never get there, you are always getting there. You must strive to keep improving. Never be satisfied with your trading system. Whilst I don't say "keep looking for fault," I do say every system and trader can be improved. The markets change their character over time, so keep working on what impacts new developments have on them. Strive to become even more disciplined and keep working on your mistakes.

Yes, even veteran traders still make silly mistakes. Look at Jesse Livermore ( and I suggest you not only read this book, but study and fear the way this guy operated). Livermore was a stock and commodity trader way back in the early 1900's. He ran a small shoestring account into several millions but kept losing it. On the one hand he was one of the greatest traders to have ever lived, yet on the hand he was dangerous in that he could not control his emotions. Having run an account up to millions and then losing it, one would think this experience was painful enough so as not to be repeated? Yet when he painfully started from scratch, built his account into several million again, only to lose it in one bad trade, then the alarm bells should have been ringing. Any-one can make a mistake but to not learn from it is fatal. Sadly, after repeating this event one more time he could not face the thought of making a come-back again and took his own life.

So whilst Livermore was a top, top trader he never worked enough on his own psychology. Had he worked on a sound money management plan and strictly followed a plan for every trade he would not have created this situation.

The lesson? Even when you have made it to become a successful trader that one fatal mistake is lurking in the dark waiting to hit you. Only by keeping on top of your emotions and working on your trading will you avoid running into a catastrophe.

How long does it take to become a competent trader? There is no set time but i would say as a general rule here are some guide-lines:

(0-1 yrs)
* Work on finding out whether you are willing to put the time and effort into finding a system that not only works but fits your personality.

* Read some basic books on the stock market. Don't just read them and think "hmm that’s interesting, nest one.." Really try to get inside the traders mind. Get a feel for how much time and effort was put in before they became successful, how many times did they go down closed avenues? What characteristic made them such a good trader?

* Attend a couple of seminars. But not -ones where the "Secrets of the Stock Market are Revealed" The secret is there are no secrets. Give them a wide berth. Go to seminars about basic chart reading skills, psychology of trading, money management, etc.. and if the lecturer knows his stuff then get his contact information and keep asking as much information as possible.

* Using a very simple charting package, start looking at some bar charts of shares and the markets. Do nothing but observe

* Buy a self help book. Could be a motivational book or similar work and work through it. My trading and life has become so much better since I started working on my-self. It will definitely help in finding a system that fits you.

At the end of year 1 you should know whether trading is for you. And a certain kind of trading technique should appeal to you more than others. Go with this natural feel, it is the one that fits you personality.

If you find trading is not for you? Great! You have saved a lot of time and money. Move on. It's not for every-one. I personally know of some traders who will have to go back to the start if they wish to succeed. In the meantime they keep handing money to the market. It's sad because they've been trading for years. When will the penny drop?

(YEAR 2)
* Open an account with a small amount of cash. This is your learning fees. Expect to lose it all as part of your fees.

* Keep reading, studying, attending seminars and asking successful traders.

* Develop a style of trading you are comfortable with. Back test it by hand and get a feel for the size, regularity and number of trades your system gives out. Try to determine how many streaks it comes out worth. ie did it have 5 successive losing trades? Did it have 7 successive winning trades? That way in the heat of battle and your system has just given you 5 successive losers you know there is nothing wrong. Get a feel for how it reacts in certain market cycles. Every system acts better in certain market conditions than in others.

* Develop a plan. (re-read section 2) Try to accommodate for every possibility.

* Keep observing the charts. I am not a great believer in paper trading in order to find how much progress you have made in trading. Simply because you have no emotions whilst playing games and it is controlling emotions that separates the winners from the losers.

But what I am a great believer in is playing simulation games so as to get a feel for how money management plays such an important role and for you to get a feel for how any game of chance can and will have streaks.

This is what i do from time to time. Get a hat or jar and place 100 marbles inside. I paint the winners blue and the losers red. I paint a HR (home run >10 * Risk gain) on just four of those marbles and I paint a BL ( big loss >4 * risk) on four of them. All the rest are either 4 * Risk gains or 1 * risk losses. Here's the interesting part. Start risking different dollar amounts on each trade and see the difference in your results after 100 trades. This should really hammer home the importance of money management.

Firstly, say you start with a $10,000 account risk just 2,5% on each trade. Therefore, risk per one trade is $250 or R = $250. If you draw a losing marble your account is debited $250. If you draw a winning marble your account is credited by 4 * $250 = $1,000. If you hit a "Home Run" then your account is credited by 10 * R = $2,500. On the other hand if you hit a "big loss" trade then you are debited by $1,000.

Put the effort in and give this a try. You'll be amazed at the difference position sizing can have on your account after 100 trades. You'll see even in a 50/50 you run into streaks of winners and losers. Having 5 successive winners and losers is quite common. Not only that try to imagine your-self trading this system. How are you going to be feeling after taking 5 successive losses? Will you be feeling something is wrong. What happens if you risk $500 per trade and you start off with a "big loser"? That's a $2,000 loss. Can you come back from this? Be pro-active and play around with the figures it's a great simulation.

* If you feel comfortable trading make a trade.

The whole point of trading is to follow your rules. Making or losing money is not the important point. Trade with such a small amount it hardly seems worthwhile. What you want to know here is:

How do I react when my money is down?
Can I follow my rules?
Is my system working in the long run?

(Year 3)
You should have your own system that fits you and starting to take small gains out of the market. If you still find your-self lacking the discipline to follow the signals ask why? Keep playing the simulation game as though it was your system and see why taking four or five successive losing trades is acceptable as long as you can manage the risk.

(Year 4)
By now, if you are still trading, you should be pulling consistent profits from the market and know your-self well enough to continue learning.

Consider learning to trade like taking a degree in the stock market. Are you willing to sacrifice 4 years in order to learn the trade? If not, then walk away now. If you are then get to it.

If you want to be a top trader there's a lot of work involved.

Don't be fooled by all the trade magazines saying you can pull 100% out of the markets year in and year out with no effort. It isn't going to happen. But if you really do keep working at it the rewards can be amazing.

No comments:

Post a Comment