In this post I’m going to talk about 5 things that every trader needs to be successful. The list is not mine, I’ll talk about that in a second, but the discussion of those 5 things are my thoughts.
Where Did the Trader List Come From?
Years ago I came across Robert Prechter’s thoughts about trading and what it takes for a trader to be successful. Now some of you may ask, who is Robert Prechter?
He is the co-author of the famous book on Elliott Wave called “Elliott Wave Principle” first published in 1978. By the way, Paul Tudor Jones considers this book one of the bibles of the business.
Mr. Prechter became very well-known for his Elliott Wave analysis and started publishing the The Elliott Wave Theorist in 1979. When the Elliott Wave Principle was published in 1978 the stock market had been violently moving down and up, but primarily sideways, since 1966.
There was a high degree of pessimism and bearishness, as the world was approaching the 50th anniversary of the 1929 crash. Yet Mr. Prechter was extremely bullish calling for a huge new bull market.
Okay so he’s an Elliott Wave analyst. What has that got to do with being a good trader? Well he also won the United States Trading Championship in 1984 with a then-record of 444% in the options trading category. Here are his thoughts:
What every trader needs to be successful:
- Have a method to trade
- The discipline to follow your method
- Get real trading experience instead of only trading on paper.
- The mental fortitude to accept the fact that losses are part of the game.
- Plus, the mental fortitude to accept huge gains. ( this only seems like an easy one, most long-term traders say it’s one of the hardest.)
Let’s discuss each of these a little more…
Have a method to trade
This does make sense but there are a lot of folks out there who just look for trading tips or follow the news or play off earnings reports.
Some of that may work every once in a while but if you’re serious about trading, you need a method. Why? Because it helps bring consistency to your approach.
It allows you to manage your emotions much better. It is very easy for greed and fear to get control when you are playing for real money without a specific method.
Discipline to follow your method
This may sound easy but it takes a lot of practice to consistently execute. There are times where you think well I see my setup but I’m just not sure it will work this time.
The thing you have to remember about the market is that you really don’t know what the market will do. You are playing probabilities.
And then the one time you don’t follow your method…you miss out on a killing or you get killed. I know…I’ve been there.
Get real trading experience
Real trading experience is what matters. Only when your money is really on the line will you deal with your emotions of greed and fear.
These are a real part of trading and why I named this website Beyond the Chart.
Are there times when paper trading makes sense? It makes sense when you are trying to learn your broker’s execution system so you understand the nuances of the system.
But outside of that, there is no better education than the real deal. You just need to keep things small while your learning. And realize that you are going to pay tuition for that education.
mental fortitude to accept that losses are part of IT
This is absolutely critical. All of us went thru the education system where the focus was on getting a minimum grade to pass. These passing standards were based on getting at least a certain percentage correct, i.e. 70% was passing.
Well that doesn’t correlate to trading. In trading you are going to get losses. The key is to try and keep the losses small. In trading you can have 70% winners then have one trade that wipes it all out.
Or you can have 45% winners and be extremely successful. And by the way outliers really do matter in trading. I talk about losses in Chapter 3 of my ebook, “7 keys to Successful Options Trading“.
“Keep your losses small and you’ll never be in one (death spiral).” – Michael Martin
From “The Inner Voice of Trading”
The mental fortitude to accept huge gains
This is easy isn’t it? That’s what we’re suppose to do is let our profits run, right?
Okay, so you let your profits run…sitting on a huge gain and then out of the blue, the market broke or the company had a bad announcement, and poof!
So now you are not feeling quite as comfortable trying to capture large gains. We all know the market can take things away pretty fast. So what do you do?
You can capture some of your profits and let the remainder run. You can make sure you have a trailing stop of some kind to exit the trade when it turns.
But this gets back to point number 3. It is hard to learn how to deal with your emotions if you don’t have your money on the line.
And it is easier to deal with your emotions and the inevitable losses when you have a method. And the more you follow the method, the stronger you become and the more discipline you gain.
To your success!
In this short public video I check the market action and then review 3 retail stocks that really moved this week: Ralph Lauren (RL), Tiffany (TIF) and JW Nordstrom (JWN).