Successful Traders versus Losers

Q.: What qualities do successful traders have?

A: Good traders are emotionally balanced and make good decisions in their head (psychology). They enter a trade, take their profit or cut their losses and move onto the next trade. Successful traders are thus disciplined and able to take decisive action immediately when required. They consider trading as a business and their choices are based on facts and knowledge and backed by experience.

From what I gather, if I were to put day trading in a nutshell it would be something like this -:

• Gain a correct understanding of the various markets, how that act, how they interact, and why the markets do what they do.
• Develop a risk strategy so as to exploit money-making opportunities as they present themselves.
• Manage their capital and income properly.
• Manage themselves properly.

Thus, to be successful you have to set yourself strict targets and STICK TO THEM. If a trade isn't going the way you want it to, then get out. An experienced trader will expect and accept the outcome with equanimity. It has been said many times before that it is better to take a small loss and re-assess than just hang on and hope it will turn round and end up with a big loss later. Understand exactly what you want to get out of a particular share before you buy it.

Q.: Why do traders lose?

A: In no particular order -:

• No Edge.
• Decent ideas, but do not understand the risk, or how to isolate their strategy from a risk/reward perspective.
• Get too cocky, trade bigger, don't understand the potential downside of their strategy.
• Strategy decays, don't compensate by changing position size, commissions eat them alive...etc
• Over tweak their strategy and lose the ability to isolate the behavioral or arbitrage effect they are looking for. Because the system got to complex they are now unable to work out why it is that way, so they go on a vicious cycle of over tweaking.
• Fat tails hit them hard and market conditions temporarily go to **** in a way no one can predict.
• Start dabbling in markets they have no business getting involved in, either through lack of understanding, capital, or potential profitability.
• Psychologically have difficulties taking losses. Spiral of bad trading begins.
• Don't keep learning day in and day out, become lazy, one of the other points hits them (strategy gets stale).
• The reason why they're a good trader passes. Live nights 20 years ago used to rule Vegas. Now they're unable to compete. They can never be agro LAG equity calc wizards and no amount of trying or wishing will change that. They bust and fade into the distance.

Q.: Why do so many traders wipe out their account?

A: I've come up with several possibilities: -:

• The trader has a flawed understanding of how the markets work (either incorrect or incomplete).
• The trader has a flawed risk strategy.
• The trader has a satisfactory risk strategy, but fails to execute it properly.
• The trader is initially undercapitalized.
• The trader doesn't follow proper money management.
• Psychological reasons (stress, "tilt," etc.).

Q.: Why do people think they can trade without doing their homework?

A: People typically work all their life in a business or trade that they know inside and out. They know a competitor couldn't walk in and take over from them without knowledge and work and study and experience. But they still decide to put all their money into oil futures, because they're sure it will go up. They do not study the instrument and do not realize that this is work and that it takes considerable effort and study to be successful in this business. Not only do you have to understand the market workings and what the price is telling you but you have to take calculated risks. Otherwise it might be best to just put your money in a high interest bank account and forget about investing. Before you get into trading understand what's involved. Making money in the market requires a good deal of education, like any trade or business. If you've got the time, the drive, persistence and the right psychological makeup, you can enter that elite realm of the truly successful traders.

Finally, but not least you need to understand yourself. Each of us is different although we may share a number of similarities to others. We need to understand our knowledge and skill levels, our savvy and sixth sense, our self-discipline, our trading time horizon and availability, the size of our account size, your age (as this will determine how much risk you can take) and personal tolerance to risk, to name only a few variables, but crucial matters to consider. You need to match all of this with whatever your trading plan is.