5 Qualities of All Great Traders

By Guest Author - February 21st, 2012, 7:30PM

1) Loss cutting: Trading has this amazing historical footnote: If you study the great traders throughout history, they all share the same statement as their number one rule: CUT YOUR LOSSES! Capital preservation “keeps you in the game.” It is especially important once you understand the math: a 25% drawdown requires a 33% gain to get to break even; Down 33% means you need to rally 50% to get back to square one; As we saw in 2008-08, a -50% loss requires a +100% gain to get back to even. In sports “Defense Wins Championships.” The same goes for stock trading. Most traders need to focus more on defense.

Even Warren Buffett understand the traders credo: “The first rule of investing is don’t lose money. The second rule is don’t forget Rule No. 1.

2) Confidence: There is nothing worse than seeing a great opportunity but not having the courage to “pull the trigger” and execute the trade. Freezing up due to fear does NOT happen to great traders. These thoughts don’t even enter their mind because they are confident in their plan. They know wht they will do if the trade goes their way, and perhaps more importantly, they know what to do if it goes against them. Confidence cannot be taught. It comes from making decisions, taking action, and learning from experience.

3) No ego: Successful traders may have big personalities, but they separate their ego from their trading. They might have serious conviction behind their positions, but when the market proves them wrong, they don’t argue with it. They simply move on and accept it.
Two things I never argue with: the stock market and women. Both of them are smarter than me, and both are always right! (BR: Spoken like a married man)

4) Consistency: The best at anything are the best because they are consistent. Michael Jordan isn’t considered the best basketball player ever because he scored 30 points ONCE in a game. It’s because he averaged 30 points per game over his ENTIRE career.

Traders should not obsess with their day-to-day profit & loss. Rather, they should shoot for consistent positive months, quarters, and years with minimal draw downs. You do not want to be the “boom and bust” trader who does well in a strong market but gives it back during market corrections. These guys are a dime a dozen and typically get blown out of the market at key pivot points (Last cycle, I knew a few who became mortgage brokers — how is that for timing?)

5) Students of the market: Successful traders NEVER get complacent. They are always eager to learn, constantly looking to improve their skills.
One way to improve is through post analysis of your trades. It is important to look at your numbers and make sure your losses are smaller than your gains.
For technical traders, studying your entry points and looking at charts that worked (and didn’t work) is part of the constant learning experience of becoming a confident and consistently profitable trader.
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Fahmy holds seminars for active traders who want to improve their returns. Readers of the Big Picture who are interested will get a $500 discount on the full day event. Go to TradingBigWinners.com and enter the promotional code: “bigpicture500” for the New York (3/3) seminars. I will be discussing trader psychology and cognitive errors at this seminar.

After the market made a u-turn when it opened high, it just stay idle/sideways within the 13000 level which is the highest points since 2008 as reported.

It formed a head and shoulder pattern, a sign that a bearish trend is in the offing at around 1:30 pm. ET.

Trading the market for long when it made a u-turn and shorting the market at 1:30 pm. ET are the two viable trades that can be initiated.

But trading them needs a lot of patience.

The market made a u-turn after it went up in the open only to go down due to early profit taking.

Taking the advantage at buying low selling high was the right trade today by taking/anticipating the trade when it consolidates at the bottom.

The market gap up as shown from this chart in the Globex market due to positive news coming from China and the looming decisions from the Greek parliament regarding their debt dilemma.

I have this convincing sentiment that it will continue its upward momentum come regular open tomorrow.

Trading and Psychology, What Traits Equate to Success?

Guest Post by Tom Cleveland of Forex Traders

Investors and traders alike are instructed early on in their training that success depends on three fey factors – knowledge, experience, and emotional control. While the first two items can be approached in a straightforward manner, the latter factor, the psychology of dealing with risk and reward when real money is on the line, is one of those “muddy snowballs” that no one quite knows how to handle or master in a step-wise fashion.

As a result, we listen to what is necessary to cope with the issue, but do we really “hear”? When we trade from our emotions and then ride a “loser” for all it is worth, we know that we have violated the cardinal rule of trading. Yes, we abandoned out trusted system, we cancelled our stop-loss order, and we were sure the fundamentals favored our position. The market, however, did not agree, yet we continued to hold onto our position, refusing to accept a loss until it was so large that we had to gulp and exit.

Sound familiar? Psychologists would tell us that investing has nothing to do with feeling like a loser, but everything to do with how we manage decisions related to risk and how we decouple that experience from the concept of loss. If we must view risk in a different way, then what characteristics support that type of thinking? Here is a brief list of psychological traits that successful traders possess:

1) How do you handle mistakes? If you were shamed early in life, then mistakes may threaten your personal sense of self. Successful traders understand that mistakes are part of the game. Mistakes do not reflect on your inner core. The errors are due to actions in the market. Your role is to accept them and adjust quickly, not take them personally. Learn from them, and move on;

2) How do you approach decisions? If you enjoy the intellectual challenge of interpreting the nuances of your trading system and how it applies to current market conditions, then you are a step ahead in the game. Focus on the components of the decision at hand, and try not to be overly concerned with the potential for loss;

3) How do you deal with denial? Some denial is actually good, if it allows you to concentrate on the decision in front of you, rather than become overly consumed by the fluctuations in the market. Your faith in your trading system and routine must trump any undue feelings of anxiety about what you may lose. Confidence will accrue if you follow your process;

4) Do you trade in isolation? Trading can be a highly individualized activity, leaving little room for diffusing emotional tensions. Studies have revealed that many investors handle the concept of loss better if they share strong emotional ties with another person. Having a reliable relationship bond with someone else can actually improve your creative activities by providing emotional support for you sense of self;

5) Lastly, do you feel like an outside observer? Many successful traders actually regard themselves as somewhat different than the general population, following the beat of a different drummer, so to speak. They have developed confidence in their own abilities, and, although they are not loners, they are not followers either. They have learned to trust their own judgment and display a modicum of skepticism.

“Know thy self” is the mantra to follow before embarking on any active trading regimen. If the traits above ring true, then stop questioning your ability and focus on your trading system and logical decision-making process.

Be Selective In Putting Trades

The market (YM) made a dramatic move upwards today only to lose its momentum and stay idle (choppy) halfway through the trading day.

It tightly consolidates from thereon without any clear indication where it is heading because the two other core index (Nasdaq, NQ and the S&P, ES) made a dramatic drop after they surge in the open.

For most three hours or so into the trading, you can't get any idea where or what trades you are going to initiate, either a long or a short.

That is where patience and sitting tight is the virtue in trading.

If you are patient enough, you can trade YM at around 1:00 pm. ET. for a long trade.

You can spot the consolidation between 12:00 noon to 1:00 pm. as you can see from the chart and the obvious small body bars that consolidates tightly.

Placing too many trades without any clear picture is one cause that depletes account because of commission costs, thus it is necessary to put trades that are highly probable and be selective.

Trade What You See And Not What You Think

The market went up clearly Thursday and by just looking at it (the chart below), buying at the open and selling at the close is the crystal clear to trade.

But when you are in the market tick by tick, you cannot spot the outcome the way you can conclude as shown from the chart.

That's where you as a trader, it is important to read the market's mind, and not imposed how your (as a trader) mind/will imposed to the market.

That's exactly what happened with my trades, kept imposing how "my mind" will work where the market goes - not the other way around (let the market do its thing, and ride with it).

Trading is simple but its not easy!

That is, if you let your "own" mind play by yourself imposing your will where the market goes is an exercise of bad trading practice.

So next time around, trade what you see and not what you think!