What distinguishes a successful trader from an unsuccessful trader?
Experienced traders will tell you it’s just that, experience.
Experience comes by learning from one’s own mistakes in actual trading, but also by learning from others’ experiences and mistakes through books, tapes, seminars and research.
1. Develop a trading system and stick to it.
Successful traders depend on a systematic approach to the market. They have a sound trading plan for every position before they actually place an order. This allows them to determine without emotion when to cut losses and how long to let profits run. Once a position has been established, it is too late to formulate such a plan.
Any trading system should encompass four separate functions:
2. Eliminate impulsive and emotional trading.
Once you have a trading system in place, don’t deviate from it because of fear or greed. Condition yourself to act on your expected gain/loss ratio; be prepared to accept many small losses and to accept a few large gains when these occur. Do not try to beat the game everyday. Do not fight the trend. Try to get aboard any trend early. Like in any other walks of life, being late can be very disappointing. Remember, by the time the newspaper’s report the market moves, the move is already occurring.
3. Liquidate unprofitable positions early.
Trade every position in commodity futures according to a quick delivery of return theory. A position must return a profit (ever so small) after 2-3 days. If it does not, and especially if it is going against you, get out. To do that, use actual stop orders or mental stop orders. We believe you should always use stop orders. Be aware, however, that stop orders do not necessarily limit your losses in all cases.
The time constant of most markets is such that a trend or a trend reversal will probably last for more than several days. Therefore, if the market has been going against you for two consecutive days after establishing your position, chances are you will experience a rough tumble for a much longer time. Realize your mistake (no one is perfect), quickly cut your losses to a manageable size, and look for a fresh opportunity. Always try to learn from your mistakes. After you complete each trade, write a detailed analysis, explaining what did and did not work.
4. Don’t go on a margin call.
If you cannot anticipate margin calls before they occur, please read this paragraph over and over again. A margin call means that all the cash left in your account is not enough to cover the margin requirements of your positions. In other words, when you are on a margin call, you have over traded! Either some of your positions are probably big losers, you haven’t cut losses quickly enough or you are spreading your equity across too many positions. What should you do? In most cases, you should liquidate.
5. Don’t take delivery of a commodity.
Professional traders leave the delivery situation to the commercials and producers, such as slaughterhouses, farmers, oil drillers, etc. Deliveries are not the way to remain in a market for speculative purposes; instead, the professional trader is already out of the market or has rolled over his futures position into the next traded contract month well before first notice day. Deliveries are expensive, and most have an element of market risk which the professional trader does not want to accept merely for the sake of maintaining his position.
6. Don’t trade if you don’t feel like it.
You should be in optimum condition to trade, both mentally and physically, in order to have confidence in your judgment and confidence in your ability to execute trading signals correctly.
7. Research all you can.
Professional trading skills are not acquired overnight. Time and time again, traders fail due to their lack of knowledge. Thus, every trader should aspire to gain as much knowledge about this industry as possible, and to remain open to possibilities of new and changing markets. The more you research, the easier it is to evaluate various strategies and tactics.
8. Don’t listen to other people’s opinions.
You’ve done your own research, so your analysis is just as valid as theirs. Get to know your personality and trading style, and write down your trading objectives. What works for one trader may not work for another.
9. Keep your trading goals realistic .
Ask yourself, ‘Why am I trading?’ If you answer anything like, ‘to make consistent profits’, you already have the right state-of-mind. A more ambitious answer implies that you will be spending a lot of time (and probably money) achieving your goal.