Yesterday Norman brought us a guest blog post that I think most everyone that read it enjoyed (re-read here) and I've asked him back to teach us a little about the mental aspect of being a successful trader. We know it's more then just picking winners, but Norman also lays out 7 other crucial steps that you should follow. Also his 71 page ebook has been read by over 25,000 traders just like you, and you don't want to be the only one without his free teachings. Grab his 71 page ebook, enjoy the article, and comment, THANKS!
Many investors take actions that aren’t in their best self-interest. They make irrational trades; they trade based on emotion, rather than logic; they hold on to a losing position due to their unwillingness to admit they made a bad trade; they trade based on greed or panic… the list is endless.
Successful traders, on the other hand, all have a few things in common. Developing these characteristics and habits will help make you a successful trader.
1) Successful Traders Set Goals
1) Successful Traders Set Goals
Successful traders tend to be incredibly goal-oriented. Why? Most people perform at their best when they’re reaching for a clear goal. And there are three basic qualities that make up a clear goal:
- The goal must be realistic. If your goal is to double your money every day, it sounds great – but it’s not realistic.
- The goal must be attainable. Just like with a realistic goal, an attainable goal must be within your current capabilities. The best goals are short-term goals; make your first goal a small one, and then continue to increase your goals as you experience success. World-class sprinters don’t start by thinking of winning the Olympics.
- The goal must be measurable. Goals that aren’t precise, and can’t be quantified or measured, aren’t really goals at all. If your goal is to be wealthy, that’s great… but what does “wealthy” mean? Our guess is that your definition of “wealth” will change as your net worth increases. If you can’t define your goal, and measure your progress towards it, then you have no way of assessing your progress or of making changes to your techniques and strategies that allow you to reach your goal.
Successful traders set goals, and they also are confident they can reach their goals. Confidence is a key to staying rational, logical, and disciplined. Starting with small, realistic goals will help build your confidence in yourself and your abilities.
2) Success Can Come at Any Level
Whether you’re a beginning trader, a trader with some experience, or someone who makes his or her living strictly from trading, you can be successful. Many people think they have to have significant capital, or years of experience, to trade successfully. That’s not true. (It’s also true that if you don’t stay disciplined, focused, and rational, you’ll end up as a losing trader, regardless of your level of “expertise.”) All successful traders started as small investors; they didn’t trade more than they could safely risk, they learned from their mistakes, and they developed systems that worked for them and that fit their personal styles. We have not defined different strategies for different “levels” of traders in this e-book because the principles are the same: logical, focused, disciplined trading creates success.
3) Successful Traders Specialize
It’s simply not possible to understand and stay in touch with everything that occurs in all the types of investment vehicles and markets across the world. While some traders have developed systems that allow them to trade in multiple venues (for instance, in different stock markets around the world), most traders specialize in a particular type of investment, and in a particular market. You may enjoy trading in commodities futures; that enjoyment will help you focus and stay in touch with market events. If you aren’t interested in currency trading, for example, don’t trade in it – your lack of knowledge and motivation will cause you to lose focus and make mistakes. Successful traders tend to specialize; they pick an area to gain in-depth knowledge of, and they follow it closely, learning from past trends and patterns, and from their own trades. If you’re a beginning trader, we recommend focusing narrowly on a particular investment vehicle and market; learn all you can, about the market and about yourself, before you move into other investment types.
4) Successful Traders Take Losses in Stride
No one likes to lose. But losing is a fact of life for traders; the key is to limit your losses and maximize your successes.
A losing trade is not a failure. It isn’t a reflection of you or of your overall judgment. (If it was possible to be right every time, we’d all be rich.) The only way a losing trade is truly a failure is if you aren’t willing to take the loss, without hesitation, and move on to find winning trades. By accepting that they’ve made a losing trade, and getting out of the position, successful traders focus on making money – not on being right all the time.
Many traders feel they don’t want to “lose” money on any trade, and they stay in losing positions in the hopes that it will recover to at least the break-even point. There are three problems with this approach:
- The position may never recover to the break-even point.
- Holding on to a losing position ties up capital that could be placed into winning trades.
- Holding on to a losing position is an example of unfocused trading and a lack of discipline.
Successful traders are willing to take small losses. If you aren’t willing to take small losses, or don’t have the discipline to take small losses, don’t trade.
5) Successful Traders Stay Focused During Rapid Swings
Most of us were raised to think that it takes years of hard work to acquire wealth. That viewpoint doesn’t apply to trading in the markets; you can make thousands of dollars in minutes under the right circumstances. Successful traders understand that money can be made or lost extremely quickly, and they stay calm and rational.
Why is that attitude important? Let’s say you’ve made several thousand dollars over the course of an hour trading futures contracts. You’re thrilled and excited, and you may lose your composure and start making irrational trades. You may stay in the position longer than you should, for one of two reasons:
- You think the market will keep going up, and you don’t want to limit your gains.
- The market falls, and you don’t want to give up all the gains you’ve made, so you hold on in hopes your position will rally.
If you accept and understand that huge amounts of money can be made in a short period of time, you are less likely to become undisciplined in your trading. Successful traders take their gains in stride, no matter how large. They quickly move to protect their positions by setting stops, or covering a percentage of a short position. Successful traders stay rational and disciplined in the face of rapid gains or losses because they understand the nature of trading.
6) Successful Traders Stay Flexible
Staying flexible requires that you stay detached and unemotional about your trades. No matter how strongly you feel about your analysis of a position or a trade, you have to be willing to change that opinion and act quickly if necessary.
Successful traders realize that bad trades reduce the gains made from past trades and potential gains from future trades. Successful traders change their minds quickly and easily, and are not concerned about whether they were “right” or “wrong.” They’re concerned with maximizing their gains and minimizing their losses – and to minimize losses, they have to be willing to quickly change their minds. Remember: the more flexible you are, the more successful you will be.
7) Successful Traders Don’t Leap Before They Look
One of the most common mistakes inexperienced traders make is to trade when they see an opportunity they think might be too good to miss. Jumping into a position based on a hunch, or on the belief that you may be missing an opportunity, is no different than gambling. Almost every investor at one time or another has felt a rush of greed or enthusiasm for a trade – based solely on the desire not to miss out on a great opportunity that might be available.
Successful traders practice self-discipline, and apply skill and logic to their trading. They learn every day, and they use what they know to make intelligent decisions on every trade. Successful traders don’t worry about missing out – they focus on making intelligent decisions.
8) Successful Traders Don’t Passively Follow “Expert” Advice
Blindly following the investment advice of a broker or analyst is foolish and self-destructive. Oftentimes, the broker’s self-interest is completely different from yours, because the broker gets paid when you make a trade, whether it’s a good trade or not. He or she wants you to trade. Analysts may have inside knowledge or years worth of experience, but in the end their opinions on the markets are just that – opinions.
Successful traders take responsibility for their trades and therefore their money. They learn, they stay focused and disciplined, and they make their own judgments about their trades.