August 25, 2010

7 Habits Of A Highly Successful Trader (6 of 7)

6) View Trading as a Score in Points and Not In Money:

Really what I am saying is "follow your time tested rules which you have complete belief in and forget about everything else" 

How can you do that when it's money we are trading with? Use some imagination. Pretend it's not money but simply a game your playing and your account represents points scored. Stop counting dollars every time the market moves and start concentrating on following your rules flawlessly. When you can operate on this level not only do your profits soar over the long run but it takes away all the stress of trading. 

Think about it. No more are you watching the quotes intra-day thinking "wow! I have just made enough to buy a new car," or "uhhh.. I've just lost my holiday money" This kind of trading is emotionally draining. No-one can succeed like this. This was me in my early days.I would be so down when I checked my quotes during the day only to find I had lost $500. And the next day when I found I was up by $500 I was the life and sole of the party. Even if I could have made a success by trading this way I wouldn't have enjoyed it and I would have given up.

Nowadays with my low risk/ high reward trading system I check the charts at the end of day in 5 minutes and that's it. I simply ask my-self: " Should I buy, sell or hold according to my rules?" I give my-self ten seconds to answer and do what has to be done. I am not a trader any more but a rule follower. That's how I feel. ( why do you think I have so much time to write?) 

Reading Market Wizards I and II it was a prominent feature I noticed with all top traders. They never saw the markets as a cash box but simply as a way of operating a business. the name of the business was to follow their rules and score the points. It's not possible to become a top trader if you view every tick in the market as money lost and gained. 

If making and losing money leads to emotional distress and joy and emotions are one of the most potent destroyers of successful trading then common sense dictates that in order to be a Highly Successful Trader you must eliminate all emotion from trading. How is this done? Easy, follow the rules. How do you follow your rules? Make it THE most important element in your trading. Forget about the money that will take care of it-self it's all about those rules and how well you can follow them. 

If you ever just read one book on the stock market then please let it be: " How I Made $2 million" by Nicolas Darvas 

I love this book so much because when you have read it as many times as I have (50+) you begin to realize how well this guy turned his trading around from an emotional losing trader into a robotice, disciplined, money, generating, machine. What made his success possible? Apart from the usual accepting complete responsibility, developing a system that fitted him, planning his trades and lots of initial groundwork. The real reason he made so much money was because he never counted the money in the general sense. He had a set of rules and when it flashed a buy he placed on a percentage of his capital. It made no difference whether it was $5,000 or $500,000, it was all the same to him. He stopped counting money and flawlessly followed his rules. 

If I could just describe a section that had profound effect on my trading. In one trade Darvas bought $350,000 of a share at $53 1/2. The share then climbed to over $100 and his broker telegrammed him with the message: "profits now $250,000" Darvas now realized that whilst he had been so busy concentrating on folowing his rules he has forgotten all about the paper profits building up. When he received the telegramme he now knew if he sold out he would be rich for life ( this was the 1950's) Every fiber in his body was saying "sell. abandon your rules and take the profit." 

So he walked around Paris trying to work out what to do. Questions and thoughts such as will the share fall back? Should I sell and take the sure profit? Shall I just break my rules this one time? Kept repeating them-selves time and time again. 

Finally he decided not to sell and to stick with his rules. It was anything but easy to do. But he was proved right. In the weeks ahead the share continued to rise and making that decision to stick to his rules he was able to hold on and make much more profit. 

Had he have constantly been calculating his trades on a day to day basis in money terms I doubt he would have had the nerve to stay in so long. Amazing story and one definitely worth reading. 

You see how theory is all very well. Every trader worth his salt knows the Wall Street sayings : 

"cut your losses" 
"let your profits run" 
"trade with the trend" blah,blah,blah 

But it is another ball game to do this in the heat of battle. 

Time and time again when I enter a trade I want to bend the rules, "just this one time." But I have gathered enough experience to realize I can NEVER break my rules. Not one trade can be the exception. I have learned to do this by counting in terms of points scored and not money.

What separates the winners from the losers? It's certainly not knowledge? I believe what really separates winners from losers is the ability to follow your rules without exception, regardless of the circumstances. Very few traders have the discipline to do this.

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