What Makes a Successful Trader?
NOV 2007
I've had a chance to work with a lot of great traders throughout the years, and I've learned from them. I've also learned there are four main components to trading success: education, capital, discipline and experience.
Education
It all starts with education. I started working in the trading pits at the Chicago Mercantile Exchange in 1988. I watched traders all day, and took every educational class the exchange offered. But after eight years of study, I found I still didn't know what I was doing. You could spend thousands of dollars on seminars, books, DVDs, etc. but it's equally as important to learn from other traders. And, you need to pinpoint your education to the markets you want to trade. The education has to be ongoing, too, because the markets are always changing. You have to be able to keep abreast of the markets as conditions change.
Capital
Once you have a good base of knowledge, you have to have adequate capital to trade. Don't expect to make a million on a $2,000 investment. Sure, I have seen very successful people who have started out small—say $3,000 to $4,000. But they are exceptions, and they are natural traders. I think you need to have $10,000 or $12,000 to start before you can trade. There is a learning curve involved, and you need a cushion to weather the inevitable mistakes and misses along the way. A larger account allows you to survive downturns and still stay in the game. With a larger account, you also have greater flexibility and strategies you can pursue. You can trade more than one contract at a time in many markets, and you can scale in and out of your positions. Take your first $2,000 and use that to get educated, and then build up enough capital to learn how to trade through good markets and bad.
Discipline
Discipline is a time-worn word, but it really is the key to successful trading. What will separate you from the rest—and allow you to eke out a few ticks a day, even as a beginner, is discipline. What will enable you to grow that into a real success is again discipline, along with experience.
Discipline has three parts: entering a trade, exiting a trade, and trusting what you've learned. As a new trader, my problem was usually the first and the third of these components. My early education was too focused on the "big picture" to help me pinpoint exactly where to enter the trade – so I couldn't trust my system. Trust your system. If you've gotten educated about the markets, you've done your homework and have developed a plan, but are not acting on the signals you have been given, then you don't trust what you've learned. If you can't act on your signals you don't trust them, and therefore you need to find another approach.
For example, if you are watching the Moving Average Convergence/Divergence (MACD) and you see a crossover that represents a buy signal, and you don't buy, then you don't trust it. Remember, you can't make money if you aren't in the market. Trust your education and your plan to get into a trade. Fear is another way people fail; they are too afraid to put the trades on. But discipline doesn't end there–you must exercise discipline to get out too. Don't get greedy. Start to get out of a trade when it crosses the line between being a "nice" trade and "squeezing for a home run." And of course, get out of the losers. Every one – all the time. Losing is part of trading and you must have the discipline to accept that.
What you are trying to do is take your emotions out of the market and out of your trading. If you have a system and it tells you to buy, you buy. If it tells you to sell, you sell. You trust your system. That doesn't have to mean a mechanical system. It's just the trading approach or plan that you determine can work for you, which you've developed from your education, including learning from other traders. Having a solid plan or protocol in place takes the emotion out of your trading. You establish your rules, and you just follow them. You watch the setups, and you act.
It's also important to trade within your psychological framework. The way you treat money is ingrained in you as a child, and this psychological framework that can make it hard for many people to take risk. Personally, I had to accept this was the hand I was dealt, and had to learn how to deal with it. We are all built differently; some traders are better able to handle greater risk and trade larger size. Some traders are comfortable holding positions overnight; some aren't.
Many traders think they need to trade more size in order to be successful. But that's not true. I know many traders who have been successful for many years, making money every day, trading one or two contracts at a time. They are as calm as can be. The market goes their way, and they are relaxed. When it doesn't, they aren't stressed out, they get out of their trade. When you start trading too big for your comfort zone, everything changes. How much trading size you can handle comes down to your psychological framework. I primarily trade Treasury bond futures and Dow Jones Industrial Average futures, and will trade scaling up to four contracts. There have been times I've had six or seven contracts on, but for me, that starts to get too uncomfortable.
Experience
The great traders have taken the steps presented above. They have gotten educated, they've had adequate capital to weather market storms, and have been able to develop discipline. They consistently monitor the markets, and since they have stayed in the game over time, they have learned how trade through different markets. They've seen bull markets, bear markets, choppy markets. They've seen how the market they trade is affected by factors such as the dollar, inflation, deflation, for example. When markets change, and go through transitions, they can say with confidence, "I've seen this before, I know what to do." It's similar to a trained athlete who practices, watches films, and gets better with experience in different game situations. You learn what you can expect.
You want to learn from active traders, and I recommend going to the exchanges where you are interested in trading as one source of mentoring. Ask them if there are traders in the market you have chosen who are willing to help you. See if any experienced traders offer classes. Of course you can also contact myself, or a Lind Plus broker, for help getting started. Take advantage of all the resources you are offered.
Jack Broz is a Chicago Board of Trade member and an independent analyst of U.S. equity and interest rate markets. He publishes daily analysis at www.themarlinletter.com, where he can be reached at tttdow@themarlinletter.com or 312-301-3300. Please note that is Jack's cell number; if you call during trading hours, PLEASE be sure the markets are slow.
Jack presented a Lind-Waldock Webinar on this topic on November 15, 2007. Check our Events archives at www.lind-waldock.com/events for further details. And check out our Lind Plus Market Strategists for help getting started. You can view bios of our Senior Market Strategists here.
Kristina Zurla Landgraf is editor of Lind eWire. She can be reached by email at editor@lind-waldock.com.
Futures trading involves substantial risk of loss and is not suitable for all investors.Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
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