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10 Habits Of Highly Successful Traders

What Is A Trader’s Mindset?

When a new trader places a trade, they invariably believe it will be a winning trade. If the trade is a winner the trader will experience positive emotions (happiness, euphoria and sometimes even a feeling of invincibility). If on the other hand, the trade is a losing trade, that trader experiences a number of negative emotions, disappointment, anger and (if it’s a big loser) they will experience guilt and pain.

When an experienced and profitable trader places a trade they will do so with a completely different mindset. First and most importantly, they will know what the historic probability of that trade either winning or losing actually is. Secondly they will also know what the expectancy (or Profit Factor) of the trade will be and thirdly, they will have accepted the risk. Whatever happens with that single trade, the experienced trader will experience little (or no) positive or negative emotion.

This is because they have developed a traders mindset

Why mindset can be the difference between success and failure

After the new trader has closed his trade and booked a profit they now believe that making money is easy. They go looking for the next winning trade. If they had any sort of strategy and they can not find a trade that meets their requirements, they might simply find something that looks similar in the hope it will perform in the same way. They may risk more of their capital (after all, they are successful now!). Now lets assume that they have another winner. At this point, images of fancy cars and paying off mortgages early start appearing in their mind. They imagine quitting their job and trading full-time. They are trading purely on emotion and inevitably, when things start to go wrong, they have absolutely no idea why and how to fix it.

Meanwhile our experienced and successful trader continues to trade their ‘edge’. They continues to follow a set of tried and trusted trading rules. On every single trade, they know what the historic probability of success is and for each trade they have accepted the risk of losing. They will also have in place a strategy to protect their capital should they experience a run of losers as this is all part of maintaining their traders mindset.

The top 10 Habits of successful traders’

1. Decide on the size of your trading account

Whether this is $10,000 or $1,000,000 you need to allocate and ring fence the money you are going to trade with. Not only is this psychologically advantageous, it’s also important when it comes to defining your maximum risk per trade (which I discuss later)

2. Have a trading strategy

It doesn’t matter whether this is based on fundamental or technical analysis. You MUST develop a strategy that works for you.

3. For each and every trade have a clearly defined exit strategy

For every trade you place, define both your profit target and your stop loss. Place both your stop and profits immediately you place your trade. Learning where to place stops and profit targets is a subject that warrants its own post, however for the purposes of this piece, just know that you have to know where (or when) you are going to exit the trade

4. Learn to accept the risk every time you enter the market

Most traders talk in percentages when working their stops (a stop is the maximum amount you will lose if the trade goes against you). Aim for a maximum Stop of 2% of your account (so for a $10,000 account, that means your maximum loss per trade should be set to $200). This amount is your risk – get comfortable and accept that every single time you enter a trade, you could lose $200. Are you comfortable with this?

5. Know what the probability of success is for EVERY trade you place

Your Win/Loss ratio defines your probability. If you do not have a trading history, then use your backtested results. Once you place the trade remind yourself of the probability of winning on that particular trade.

6. Stick to your plan

Once you have a plan and you know the probability of winning and you are comfortable with the risk you are taking, stick to the plan. Do not deviate. This is extremely hard, but you’ve done all the leg work so you must now develop the discipline to stick with your plan. In Trading in the Zone, Mark Douglas explains a method that can be used to stick with a plan. (It was a while ago since I read his book, but I explain my understanding of his method below)

Allocate a 2 week period where you will ONLY trade one strategy

Record every single trade in your trading journal trading journal

For every trade you make record whether you followed the strategy to the letter or whether you deviated. If you deviated make a note of how and why

Do not worry about P/L, just trade the strategy as though your life depended on it

After the 2 week period is over, review your performance –

Split out the trades you made where you followed your plan. What was the Win/Loss ratio, what was the Profit Factor. Did the strategy perform according to expectation? If so, then great, you’ve proven to yourself that the strategy is a good one and that you can follow your plan.

If the strategy did not perform to expectation, then you know you need to revise the strategy (as opposed to your mindset).

Next, review all the trades you made where you did not follow the plan. How did they perform? The likelihood is that they performed worse than trades where you followed the plan. Why did you take the trades – What emotion was involved, for example had you just experienced a series of winners and where feeling euphoric? Or had you experienced a run of losses and where chasing profits?

Understanding why you can not stick to a plan is a great way of working out how to make the changes to enable you to follow the plan. Invariably traders will find that these trades are as a result of not having a plan that is well defined. Go back to the drawing board until you have a plan that covers off set-up rules and exit strategies.

7. Have a portfolio level Stop loss

Because trading is a game of probability, there is a chance you will experience a run of losers. (Assuming a strategy has a 60% Win/Loss ratio, there is a 6.4% chance of losing 3 consecutive trades). Have a plan to stop trading after a series.

8. Have realistic expectations

Many people start trading after reading stories of how it’s possible to make 100%+ returns per annum. It is possible to make exceptional returns however in order to make these types of returns you either need to be taking exceptional risk OR you need to be an exceptional trader. Becoming an exceptional trader takes years, taking exceptional risk will inevitably lead to ruin. Do not fall into this trap. Set and manage your own expectations. Making 20% return on your account is a good return (where else can you make these types of returns?).

Your first goal, should be to break even. According to many resources, 90% of traders fail. Meaning if you can break even you will be in the 10% of those that are ‘succeeding’ or on the way to succeeding.

Your second goal should be to become consistent. Try and outperform one of the stock market indices (the median return on the S&P since 1988 was 10.88%)

The last 2 Top tips in this list are taken directly from Mark Douglas and his book Trading in the Zone – I’ll leave you to consider their meaning and how important they are

9. Remind yourself that anything can happen

10. You do not need to know what is going to happen next in order to make money

 

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