10 qualities of a successful stock market trader

[K.Karthik Raja]

10 qualities of a successful stock market trader

Many people take to trading in the mistaken belief that it is the
simplest way of making money. Far from it, I believe it is the easiest
way of losing money. There is an old Wall Street adage, that "the
easiest way of making a small fortune in the markets is having a large
fortune". This game is by no means for the faint hearted. And, this
battle is not won or lost during trading hours but before the markets
open but through a disciplined approach to trading.

1. A successful trader has a trading plan and does his homework
diligentlyWinning traders diligently maintain charts and keep aside
some hours for market analysis. Every evening a winning trader updates
his notebook and writes his strategy for the next day. Winning traders
have a sense of the market's main trend. They identify the strongest
sectors of the market and then the strongest stocks in those sectors.
They know the level they are going to enter at and approximate targets
for the anticipated move.For example, I am willing to hold till the
market is acting right. Once the market is unable to hold certain
levels and breaks crucial supports, I book profits. Again, this
depends on the type of market I am dealing with.In a strong up trend,
I want the market to throw me out of a profitable trade.In a mild up
trend, I am a little more cautious and try to book profits at the
first sign of weakness.In a choppy market, not only do I trade the
lightest, I book profits while the market is still moving in my
direction.Good technical traders do not worry or debate about the news
flow; they go by what the market is doing.
2. A successful trader avoids overtradingOvertrading is the single
biggest malaise of most traders. A disciplined trader is always ready
to trade light when the market turns choppy and even not trade if
there are no trades on the horizon. For example, I trade full steam
only when I see a trending market and reduce my trading stakes when I
am not confident of the expected move. I reduce my trade even more if
the market is stuck in a choppy mode with very small swings. A
disciplined trader knows when to build positions and step on the gas
and when to trade light and he can only make this assessment after he
is clear about his analysis of the market and has a trading plan at
the beginning of every trading day.
3. A successful trader does not get unnerved by lossesA winning trader
is always cautious; he knows each trade is just another trade, so he
always uses money management techniques. He never over leverages and
always has set-ups and rules which he follows religiously. He takes
losses in his stride and tries to understand why the market moved
against him. Often you get important trading lessons from your losses.
4. A successful trader tries to capture the large market movesNovice
traders often book profits too quickly because they want to enjoy the
winning feeling. Sometimes even on the media one hears things like,
"You never lose your shirt booking profits." I believe novice traders
actually lose their account equity quickly because they do not book
their losses quickly enough.Knowledgeable traders on the other hand,
will also lose their trading equity -- though slowly -- if they are
satisfied in booking small profits all the time. By doing that the
only person who can grow rich is your broker. And this does happen
because, inevitably, you will have periods of drawdowns when you are
not in sync with the market. You can never cover a 15-20 per cent
drawdown if you keep booking small profits. The best you will do is be
at breakeven at the end of the day, which is not the goal of
successful trading.A trading account that is not growing is not
sustainable. Thus when you believe you have entered into a large move,
you need to ride it out till the market stops acting right. Traders
with a lot of knowledge of technical analysis, but little experience,
often get into the quagmire of following very small targets, believing
the market to be overbought at every small rise -- and uniformly so in
all markets. Such traders are unable to make money because they are
too smart for their own good. They forget to see the phase of the
market. Not only do these traders book profits early, sometimes they
even take short positions believing that a correction is "due".
Markets do not generally correct when corrections are "due". The best
policy is to use a trailing stop loss and let the market run when it
wants to run. The disciplined trader understands this and keeps stop
losses wide enough so that he is balanced between staying in the move
as well as protecting his equity. Capturing a few large moves every
year is what really makes worthwhile trading profits.
5. A successful trader always keeps learningYou cannot learn trading
in a day or even a few weeks, sometimes not even in months. Successful
traders keep reading all the new research on technical analysis they
can get their hands on. They also read a number of books every month
about techniques, about trading psychology and about other successful
traders and how they manage their accounts. I often like to think
about traders as jehadis; unless there is a fire in the belly, unless
there is a strong will and commitment to win, it is impossible to win
consistently in the market.
6. A successful trader always tries to make some money with less risky
strategies as wellFutures trading, for example, is a very risky
business. The best of chartists and the best of traders sometimes
fail. Sure, it gives the highest returns but these may not be
consistent -- and the drawdowns can be large. Traders should always
remember that no matter how good your analysis is, sometimes the
market is not willing to oblige. In these times the 4-5 per cent that
can be earned in covered calls or futures and cash arbitrage comes in
very handy. It improves the long term sustainability of a trader and
keeps your profit register ringing. Traders must learn to live with
lower risk and lower return at certain times in the market, in order
to protect and enlarge their capital.Disciplined traders have
reasonable risk and return expectations and are open to using less
risky and less exciting strategies of making money, which helps them
tide over rough periods in the markets.
7. A successful trader treats trading as a business and keeps a
positive attitudeTrading can be an expensive adventure sport. It
should be treated as a business and should be very profit oriented.
Successful traders review their performance at regular intervals and
try to identify causes of both superior and inferior performance. The
focus should be on consistent profits rather than erratic large
profits and losses. Also, trading performance should not be made a
judgement on an individual; rather, it should be considered a
consequence of right or wrong actions. Disciplined traders are able to
identify when they are out of sync with the market and need to reduce
position size, or keep away altogether. Successful trading is like
dancing in rhythm with the market. Unsuccessful traders often cut down
on all other expenses but refuse to see what might be wrong with their
trading methods. Denial is a costly attitude in trading. If you see
that a particular trade is not working the way you had expected,
reduce or eliminate your positions and see what is going on. Most
disciplined and successful traders are very humble. Humility is a
virtue that traders should learn on their own, else the market makes
sure that they do. Ego and an "I can do no wrong" attitude in good
times can lead to severe drawdowns in the long term.Also, bad days in
trading should be accepted as cheerfully as the good ones. So
disciplined traders maintain composure whether they have made a profit
or not on a particular day and avoid mood swings. A good way to do
this is to also participate in activities other than trading and let
the mind rest so that it is fresh for the next trading day.
8. A successful trader never blames the marketDisciplined traders do
not blame the market, the government, the companies or anyone else,
conveniently excluding themselves, for their losses. The market gives
ample opportunities to traders to make money. It is only the trader's
fault if he fails to recognise them. Also, the market has various
phases. It is overbought sometimes and oversold at other times. It is
trending some of the time and choppy at others. It is for a trader to
take maximum advantage of favourable market conditions and keep away
from unfavourable ones. With the help of derivatives, it is now
possible to make some money in all kinds of markets. So the trader
needs to look for opportunities all the time.To my mind, the important
keys to making long term money in trading are:· Keeping losses small.
Remember all losses start small· Ride as many big moves as possible·
Avoid overtrading.· Never try to impose your will on the marketIt is
impossible to practice all of the above perfectly. However, if you can
practice all of the above with some degree of success, improvement in
trading performance can be dramatic.
9. A disciplined trader keeps a cushionIf new traders are lucky to
come into a market during a roaring bull phase, they sometimes think
that the market is the best place to put all one's money. But
successful and seasoned traders know that if the market starts acting
differently in the future, which it surely will, profits will stop
pouring in and there might even be periods of losses. So do not commit
more than a certain amount to the market at any given point of time.
Take profits from your broker whenever you have them in your trading
account and stow them away in a separate account. I say this because
the market is like a deep and big well. No matter how much money you
put in it, it can all vanish. So by having an account where you
accumulate profits during good times, it helps you when markets turn
unfavourable.This also makes drawdowns less stressful as you have the
cushion of previously earned profits. Trading is about walking a
tightrope most times. Make sure you have enough cushion if you fall.
10. A successful trader knows there is no Holy Grail in the
marketThere is no magical key to the Indian or any other stock market.
If there were, investment banks that spend billions of dollars on
research would snap it up. Investing software and trading books by
themselves can't make you enormously wealthy. They can only give you
tools and skills that you can learn to apply. And, finally, there is
no free lunch; every trading penny has to be earned. I would recommend
that each trader identify his own style, his own patterns, his own
horizon and the set-ups that he is most comfortable with and practice
them to perfection. You need only to be able to trade very few
patterns to make consistent profits in the market.No gizmos can make a
difference to your trading. There are no signals that are always 100
per cent correct, so stop looking for them. Focus, instead, on
percentage trades, trying to catch large moves and keeping your
methodology simple. What needs constant improving are discipline and
your trading psychology. At end of the day, money is not made by how
complicated-looking your analysis is but whether it gets you in the
right trade at the right time. Over-analysis can, in fact, lead to
paralysis and that is death for a trader. If you can't pull the
trigger at the right time, then all your analysis and knowledge is a
waste.