People are drawn to trading for various reasons, but there is one reason in particular that can set a trader up for disaster.
That may come as a surprise to a lot of people, but trading with the primary purpose of making money is an excellent way to become an ex-trader. A trader whose primary motivation is making money is not seeing the big picture.
With a mindset that is geared only towards winning, and not losing, traders will sabotage themselves psychologically, and allow their emotions to influence their trades. This is exactly the kind of mentality that a successful trader needs to distance his or herself from.
Traders with the wrong attitude will trade recklessly, entering positions on a whim and hoping for the best. More often than not, this results in a trade that starts going south.
With the “never lose money” mindset in play, the trader sits and waits for their trade to come out of the red. “If I can just break even, I’ll be happy,” they think to themselves as their position loses value.
This emotional response to a losing trade becomes the norm, and every instance reinforces the very behavior that virtually guarantees that the trader will ultimately fail.
Related » Mind, Method & Money Management
Don’t treat trading as real work
Another difference between successful and unsuccessful traders is how they view their work. In most cases, many successful traders take it as a business. As a result, they do what most successful entrepreneurs do.
They come up with a plan and execute it, hire the best analysts and traders, and promote the best risk management strategies. This is what you should do as a trader.
As you start the journey, take time to learn more about how the market works. Then come up with a solid plan and learn how to execute it. Also, embrace all business strategies that successful entrepreneurs use.
Not being in control of trades
Making matters worse, losing trades do sometimes become profitable trades, further reinforcing the notion that hanging onto a losing trade is the right approach. In these cases it’s the trade that controls the trader, instead of the trader controlling the trade.
This is a serious problem that can easily lead the trader to unpleasant consequences such as the dreaded margin call.
What might have been a small loss if executed properly, can turn into a devastating loser that is eventually liquidated for a substantial and painful loss.
A well-planned trading methodology and control over one’s emotions are necessary to be successful.
Related » Dealing with Emotions When Trading
Patience is important
Another important virtue that most successful traders have is patience. There are many ways that this happens.
For example, you need to be patient to learn about how the market works before you deposit your funds. This is where, unfortunately, many people fail. In most cases, people simply want to go straight to making money, which is wrong.
You also need patience when you execute a trade. For example, you can buy a stock at $5 and hope that it will climb to $8. Without patience, you will likely exit it when it rises to $6.
Additionally, have the patience to analyze assets before you initiate your trades. This is another place where many people go wrong.
Instead of taking to analyze their trades, they move straight to open positions. This is wrong. The right way is to have a checklist that you use before opening a trade.
Manage losses, not fear them
Knowing when to take a loss can make the difference between a small loss and a large loss. A successful trader does not invest their emotions along with their capital.
Various techniques are employed by unsuccessful traders with the hope of turning a losing trade into a winner. Some traders continue to buy more shares as their position tanks, something known in the industry as “averaging down.”
These techniques sometimes work out in the trader’s favor, giving them credibility in the trader’s mind. That sets them up for disaster on the day that the trade does not come back, and they reluctantly liquidate their position for a painful loss.
Related » Loss Aversion Bias
Respected trader Paul Tudor Jones summed it up this way: “Losers average losers.” Successful trading, whether it be day trading, intraday trading or long-term investing must be based on sound reasoning.
No losses doesn't mean success
Success is not defined by never losing. It comes from self-realization, and a thorough understanding of what makes you want to trade.
If that boils down to “making money,” then you are better off walking away from the game completely.
A helpful exercise for anyone thinking of trading, and for traders who find that they are struggling, is to take the time to write down their reasons for trading. It will help uncover things that may have gone unnoticed.
It is essential to understand the true motivation for trading, an exercise that will help reveal potential weaknesses that must be guarded against.
Enjoy what you're doing
It doesn't matter if you are stock trading, futures trading or commodities trading, it should be an enjoyable and engaging challenge, something that you look forward to every day – the love of the game, so to speak.
Related » Set up trading goal
Trading can be enormously rewarding, and provide an enviable amount of freedom that not many people enjoy. Understanding that trading is about much more than the money is an essential step on the journey to becoming a successful trader.
Unlike what you might think, you cannot determine a successful trader from a poor one by his ability to win every trade.
Does it seem to you that Warren Buffet or Ken Griffith were always right? NO!
Making money must be your ultimate goal, but only as a consequence of what you do during your trading days.
External useful resources
- What differentiates successful day traders from unsuccessful ones? - Quora