Seven Habits of Highly Successful Traders

Seven Habits of Highly Successful Traders
by Phillips Wiegand Jr.

Most people spend a lot of time focusing on mistakes they’ve made in the past, hoping to avoid the same undesirable results in the future. Although this can be helpful,perhaps it would be even more useful to take the focus off of yourself and examine what other highly successful traders are doing right—not what you’re doing wrong.

Focusing on the positives and the actions necessary for success will automatically program your mind to achieve your goals and objectives, while allowing for mistakes to be made without wiping you out. So what exactly are the best traders doing differently?

Here are seven of the most important habits that you’ll need to develop a successful trading mindset.

1. They have the right attitude

As with most aspects of our lives, having the right attitude is imperative to successful trading. Most of us possess potential that far exceeds what we ordinarily imagine; yet, too often we place limitations on ourselves without even realizing it, simply through a process of denial or blame. When the hard times hit or trading does not seem as glamorous as it seemed, some begin to make excuses and steer away from their original goal to succeed. To blame a failed strategy or a losing streak on someone or something else is to seed failure. Every trader is going to have setbacks and difficult times, but it is the way we choose to handle those times that will separate us from the majority. Will you use rough periods to learn valuable lessons, or will you live in denial and make excuses for your losses? Will you let self-doubt creep into your mind, or will you continue moving forward? It’s been said that successful trading is 10% strategy, 90% psychology. Successful traders keep a proper mindset and have a positive attitude, even when the going gets tough.

2. They do their own homework

The Street has always been littered with people who wanted to make a fortune trading stocks, but were washed out because they were not willing to put forth the necessary
effort. It is not enough to simply subscribe to a couple of newsletters or trading services and feel that your work is done. Although those can be helpful tools, successful traders never blindly follow someone else’s trades without doing a fair amount of due diligence themselves. As the saying goes, “Trust your gut.” When was the last time you made money on an analyst upgrade? How about a hot tip? Most of the time, your best trades are probably those that you come up with on your own, not from the advice of an outside source.

3. They keep it simple

The advent of the computer and trading software in the last decade has been both a blessing and a curse. On the upside, it’s leveled the playing field by affording the
average Joe to make a living trading the stock market with analysis techniques previously available only to institutional traders. Ironically, this is also its downside. It’s essential to not get caught up in too many of these tools, or you may become prone to “Paralysis by Analysis”—when traders use too many indicators and find themselves at an impasse, unable to enter good trades or get out of bad ones. It’s possible to get so caught up in developing a system, tweaking a strategy just a bit more or cramming that last datapoint into a search, that it becomes nearly impossible to capture the information needed for a clear and concise trading idea. Too much information can blur the mind and guide you down the wrong path. The bottom line is that the system or indicators are not what will make you a successful trader; it is what you actually do with the information or ideas that they generate. Keeping it simple is the best way to remain lucid and avoid a convoluted thought process.

4. They have a plan

If you find yourself losing more trades than you’re winning, step back and look at your plan to see where you might have gone wrong. Oh, you don’t have one? Try again. If you want to succeed long-term, this is critical. Without a plan, you might do silly things like double down on losers or even implement the ever-popular strategy of praying that your stocks will come back. A carefully developed plan keeps things objective and prevents emotional trading decisions that will invariably lead to poor money management, excessive losses, and certain failure. Something as simple as deciding definitively when to get in, when to get out (i.e. stop-losses), and how much risk to allocate for each trade are all that’s really needed to create a basic trading plan.

5. They practice risk management and self-discipline

Habit 5 is the implementation of Habit 4. In other words, plan your trade and trade your plan. That’s a mantra of nearly every highly successful trader in existence. The objective in this business is to remain in the game. The more often you walk to the plate, the greater the chance you have of smacking the ball out of the park. Each time you place a trade, you’re taking on a chunk of risk, and there is potential for loss. Therefore, it is imperative that measures are in place to prevent a disaster if a position does not cooperate as you anticipated. Even if you know all about the protective measures available, they will not be effective unless you have the discipline to implement them as part of your plan. This may sound simple, but trading can be stressful, and stress can lead to bad decisions. Never let pride or conviction get in the way of the discipline that is necessary for risk management to work properly.

6. They practice sound money management

One of the cardinal rules of successful trading is to use proper money management. A trader’s most precious tool is his capital, and that capital must be guarded and put touse in the most efficient way possible. The primary idea behind money management is
to preserve capital while implementing strategies that incrementally provide a positive rate of return. The first question that should always be asked is not, “How much can make on this trade?” but rather, “How much money can I lose?” You must never be in a position where one trade could wipe out all of the other profits that you have accrued. In addition, you need to perform a risk/reward analysis to determine if the trade is the most efficient use of your capital. The idea is to maximize reward and minimize risk so that you can obtain the largest bang for the buck while keeping the potential downside as small as possible.

7. They adapt to change

It may sound like a cliché, but in fact the only thing in trading that stays the same is change. The financial markets are dynamic beasts that have a funny way of humbling you just when you think you have it all figured out. It’s really not possible to have a solid grasp of everything that the market discounts while it moves, and what makes it all so interesting and complex is the multitude of variables that affect the prices of securities.

Generally, we need the benefit of hindsight in order to understand the true reasons why the market behaves the way it does. Since the variables are constantly changing, you can rarely find an exact match when comparing one period of time to another. Instead, successful traders simply adapt their trading strategies to the ever-evolving market. What’s working now may not work tomorrow; and it’s always important to be flexible enough to adjust to such changes. If, for example, all of a sudden your “perfect system” begins to experience drawdowns, you should be ready, willing, and able to switch gears and institute a new plan (see Habit 4), instead of being paralyzed by losses when it’s already too late.

Conclusion

Remember that trading is just one aspect of our lives, and keeping everything in perspective is part of living a balanced, healthy, and happy life. Whether you are
performing well or running through a dry spell, emotions run high at the trading desk. It is important to mitigate these highs and lows as best you can and attempt to operate with a calm, cool, and collected mindset. In addition to these seven habits, you should always maintain a reasonable perspective of the market. It owes you nothing and doesn’t care whether you win or lose. Through your complete acceptance of this and by implementing some basic habits into your own regimen, you too can be a highly successful trader.

Small Is Beautiful:Economics as if People Mattered

Small Is Beautiful is the title of a series of books by E. F. Schumacher. The original 1973 publication is a collection of essays that brought Schumacher's ideas to a wider audience, at a critical time in history. It was released soon after the effects of the 1973 energy crisis shook the world and dealt with the crisis and various emerging trends (such as globalization) in an unusual fashion.

Schumacher was a respected economist who worked with J.M. Keynes and J.K. Galbraith. For twenty years he was the Chief Economic Advisor to the National Coal Board in the United Kingdom, opposed the neo-classical economics by declaring that single-minded concentration on output and technology was dehumanizing. He held that one's workplace should be dignified and meaningful first, efficient second, and that nature (and the world's natural resources) is priceless.

Schumacher proposed the idea of "smallness within bigness": a specific form of decentralization. For a large organization to work, according to Schumacher, it must behave like a related group of small organizations. Schumacher's work coincided with the growth of ecological concerns and with the birth of environmentalism and he became a hero to many in the environmental movement.

Quotes from the book:

-Man is small, and, therefore, small is beautiful

-"[A modern economist] is used to measuring the 'standard of living' by the amount of annual consumption, assuming all the time that a man who consumes more is 'better off' than a man who consumes less. A Buddhist economist would consider this approach excessively irrational: since consumption is merely a means to human well-being, the aim should be to obtain the maximum of well-being with the minimum of consumption. . . . The less toil there is, the more time and strength is left for artistic creativity. Modern economics, on the other hand, considers consumption to be the sole end and purpose of all economic activity."

-"It is clear, therefore, that Buddhist economics must be very different from the economics of modern materialism, since the Buddhist sees the essence of civilisation not in a multiplication of wants but in the purification of human character. Character, at the same time, is formed primarily by a man's work. And work, properly conducted in conditions of human dignity and freedom, blesses those who do it and equally their products."

-"The most striking about modern industry is that it requires so much and accomplishes so little. Modern industry seems to be inefficient to a degree that surpasses one's ordinary powers of imagination. Its inefficiency therefore remains unnoticed."

-"Ever bigger machines, entailing ever bigger concentrations of economic power and exerting ever greater violence against the environment, do not represent progress: they are a denial of wisdom. Wisdom demands a new orientation of science and technology towards the organic, the gentle, the non-violent, the elegant and beautiful."

-"No system or machinery or economic doctrine or theory stands on its own feet: it is invariably built on a metaphysical foundation, that is to say, upon man's basic outlook on life, its meaning and its purpose. I have talked about the religion of economics, the idol worship of material possessions, of consumption and the so-called standard of living, and the fateful propensity that rejoices in the fact that 'what were luxuries to our fathers have become necessities for us.'

-"Systems are never more nor less than incarnations of man's most basic attitudes. . . . General evidence of material progress would suggest that the modern private enterprise system is--or has been--the most perfect instrument for the pursuit of personal enrichment. The modern private enterprise system ingeniously employs the human urges of greed and envy as its motive power, but manages to overcome the most blatant deficiencies of laissez-faire by means of Keynesian economic management, a bit of redistributive taxation, and the 'countervailing power' of the trade unions.

-"Can such a system conceivably deal with the problems we are now having to face? The answer is self-evident: greed and envy demand continuous and limitless economic growth of a material kind, without proper regard for conservation, and this type of growth cannot possibly fit into a finite environment. We must therefore study the essential nature of the private enterprise system and the possibilities of evolving an alternative system which might fit the new situation."

-"The way in which we experience and interpret the world obviously depends very much indeed on the kind of ideas that fill our minds. If they are mainly small, weak, superficial, and incoherent, life will appear insipid, uninteresting, petty, and chaotic. It is difficult to bear the resultant feeling of emptiness, and the vacuum of our minds may only too easily be filled by some big, fantastic notion – political or otherwise – which suddenly seems to illumine everything and to give meaning and purpose to our existence. It needs no emphasis that herein lies one of the great dangers of our time."

-"Education can help us only if it produces “whole men”. The truly educated man is not a man who knows a bit of everything, not even the man who knows all the details of all subjects (if such a thing were possible): the “whole man” in fact, may have little detailed knowledge of facts and theories, he may treasure the Encyclopædia Britannica because “she knows and he needn’t”, but he will be truly in touch with the centre."

About the 25th Anniversary Edition-just published:

Small is Beautiful is the perfect antidote to the economics of globalization. As relevant today as when it was first published, this is a landmark set of essays on humanistic economics. This 25th anniversary edition brings Schumacher's ideas into focus for the end-of-the-century by adding commentaries by contemporary thinkers who have been influenced by Schumacher. They analyze the impact of his philosophy on current political and economic thought. Small is Beautiful is the classic of common-sense economics upon which many recent trends in our society are founded. This is economics from the heart rather than from just the bottom line.