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.