I firmly believe that what truly separates the 10% of winning traders from the 90% that lose is the trader’s mindset. The vast majority of traders think they want to trade until the losses hit them over and over and they just can’t mentally and emotionally handle it and end up quitting entirely. I believe the following ten principles separate the quitters from the winners in the stock market.
How Winning Traders Rebound, make a Come Back, and Never Quit
- They accept losing trades quickly but it does not define them, they learn and try again. The next trade will be more wise than the last one.
- They compartmentalize emotions by not blaming themselves but understanding the historical expectancy of their systems returns.
- They have a bias toward action by constantly doing things that move them closer to their goal of being a rich trader. (Homework, chart study, reading, being mentored, back testing, etc. )
- They change their minds sometimes, they know when to stop doing something that does not work and move in the direction of trading success through new lessons. They learn what type of trading is right for them.
- They prepare for things to go wrong through risk management and position sizing instead of just going naively toward their goals they are ready to make adjustments as needed.
- They’re comfortable with discomfort, they will accept losses and draw downs in their method, they are willing to pay tuition to the markets to get to where they want to be.
- They’re willing to wait, they patiently improve each day setting themselves up for those winning trades that will be very profitable in the future.
- They have trading heroes that inspire them to be better than they are now and give them the hope of achieving their dreams.
- They have more than passion they are on a mission, their desire for success gives them the drive to not quit until they win.
- They know only time separates them from their goals of success in the markets.
- #1 goal is capital protection
- Focus on following a process
- Rarely committing trading errors
- Trading with the predominant trend instead of your opinion
- Using entry and exit signals instead of emotions
- The goal is trading with discipline not trying to make money in every trade
- No regrets on a trade that followed your plan
- Look at charts of the next highest timeframe
- Trade for capital appreciation not to pay monthly bills
- Trading your own capital
- Having realistic trading return expectations
- Previous trade, irrespective of profit or loss has no influence on next trade – (Srinath Madas)
- Trading with a position size that keeps your emotions out of your process
- Living a healthy lifestyle
- Living a balanced life
- You know that you are the weakest link in the trading process
- “Tons and tons of evidence that the models work over time as long as risk management criteria is adhered to.” – Richard Weissman
Trading Losses: There are two types of losses, one loss is caused by the market simply not being conducive to the profitability of your system. The other type of loss is caused by a lack of discipline, causing you not to follow your trading plan, system, or position sizing. Experiencing a loss while following your trading plan is to be expected. If you are trading a proven and tested method, then you have learned that taking a loss is simply part of trading. However, if your breach of discipline caused your loss, whether not taking a stop, over riding your plan, not taking an entry, or trading too big, then it is time to learn why you failed. Ego? Fear? Greed? Overconfidence? Laziness? It is crucial that you understand your shortcomings, so you do not repeat the same mistake again. If you don’t have a quantified methodology then everything you do is a mistake.
A Mentor: Getting a mentor is a great learning shortcut. Having someone available to ask questions of, and get direct feedback from, is incredibly valuable and short cut the learning process. The hard part is finding the right mentors. If you are paying for a service then you need to verify the mentors credentials and success as a trader and coach. If a successful or rich trader agrees to help you with no compensation, it is crucial to respect their time. Have questions ready and ask good questions by doing the necessary homework. It is also possible to pick legendary traders and study them in depth through the internet, interviews they have done, books they have written, and purchasing any services they offer.
Trading Books: Books that are written by researchers and successful traders are a gold mine of information that can speed up the learning process for new traders. When looking for the best trading books, I use Amazon and focus on books that are written by traders that have successful track records or best selling trading authors that have studied trend followers and Market Wizards. I also like to see many 4 and 5 star reviews for the trading book.
- It is hard not to trade too big when you really believe in a trade entry. It is even harder to take a big loss if it goes against you.
- It is hard to keep taking your entry signals during a losing streak. It is also hard to miss a signal and watch it go on to be a big winner.
- It is hard not to add to a losing trade when the price keeps looking better as it falls lower and lower. It is hard to be on the wrong side of a trend.
- It is hard to buy a breakout in trend because it looks too high. It is hard to miss out on the beginning of a big uptrend.
- It is hard to cut a loss early with the ego wanting to be right about the trade.
- It is hard to let a winning trade run when you would prefer a quick gain than a bigger long term gain.
- It is hard to buy when everyone is fearful and hard to sell short when everyone is greedy.
- It is hard to trade through different types of markets, bull markets, bear markets, volatile, trending, and range bound because the rules keep changing.
- It is hard to convince your friends and family that there is a process to your trading and that you are not a degenerate gambler.
- It is hard to ever quit trading after you have tasted how sweet a big winning streak is and how life changing it can be.
- If you’re too proud of your trade idea it may be a bad one.
- If you can’t trade with controlled emotion the position size is probably too big.
- If the trade is going to stress you out and mess up the quality of your life it is probably not a good trade.
- If you don’t know why your in a trade how do you know when to get out of it?
- If you need to hide your trading results from your family then you may have a problem.
- Your family should be the reason that you are trading not an interruption when you’re trading.
- By the time everyone agrees with your trade you may be on the wrong side of the market.
- Don’t start bad trading habits that will cost you money in the long term.
- Always try to be a better trader today than you were yesterday.
- In trading you have to focus on the long term results not the short term annoyances and frustrations.
- Trading is a professional endeavor like any other and you can only get out what you put into it.
I had a recent poll online where I asked traders: “What is the most important element for profitability in your trading?” They had four options. Was it entries? No, entries are not were money is made, it is in the exit with profits (13% votes). So exits are the most crucial? No, size of wins and size of losses will determine profitability not just exits (13% votes). So, it’s position sizing? Trade size can make you or break you as a trader but is still just one element and part of the big process (17% votes).
What was the winner with 57% of the votes? Discipline, this is the most important element of trading. If you don’t have the discipline to take your entries, take your exits, and position size right then they do not matter. There are many ways to make money in the stock market, value investing, growth investing, CAN SLIM, day trading, swing trading, trend following, and even buy and hold investing but without the discipline to do the work to develop your own system and follow your own trading plan, no system will make you money. Discipline is one thing all successful traders share.
Read this and more from Steve on his blog NewTraderU.