In “Part 1” of this series, we highlighted seven success habits that veteran traders regard as important enough in their daily routines that they should be shared and followed by their brethren in the industry. These bits of wisdom were gleaned in private interviews over many years until a consensus formed around two sets of seven each, as presented in this two-part series. Trading forex is difficult and high risk, but if you have a mentor at your side that keeps you focused on what he has learned from experience, then you do have an edge in this hazardous profession that will benefit you in the long run.
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Learning new habits, however, can be difficult. It is one thing to read and think about them – quite another to incorporate them in real time. One unfortunate truth about handing down wisdom is that life’s most important lessons must be lived to be learned. In other words, you will have to make an effort to “live” each new habit that you wish to absorb in order to “learn” it completely. You will more than likely not find any surprises in these fourteen habits, but you may notice a particularly new twist in how they are applied. Try adding a few of them to your practice regimen. Experiment, adapt, and make them your own. What have you got to lose?
Without any further adieu, here are the final seven habits for your consideration:
#8 – Accept that anxiety is part of your decision-making process?
I once had a CEO that instructed his managers that they had to be willing to get past not having enough information in order to make an important decision. Innovation and risk taking require it. His point was that leaders always feel uncomfortable, whereas managers (he wanted us to lead, not manage) strive to be comfortable by waiting far too long to decide anything. When questioned, this CEO admitted that he had never had a day that was not filled with anxiety over the decision-making process, but he had learned to accept it and push through it, and this fellow did make great decisions.
The trading profession is no different. Inexperienced traders may believe that veterans have learned to divine messages from the nether world with apparent ease and beat the market, as if they see something no one else can fathom. Sounds like fun, but we have never spoken to a successful veteran trader that feels this way. They have anxiety, too. They are just as uncomfortable as you are when they sit before their trading screen, but they have learned to accept it and to move on. The anxiety focuses their attention on what they do see and know, and they accept that they could be wrong, or right for that matter. Anxiety is a given. Experience will not make it go away. Use it to your advantage.
#9 – Learn to be patient with winning trades, but very impatient with losing ones.
This bit of wisdom sounds so simple that most readers of this article will quickly jump to the next habit heading, but wait! How many times have you found yourself on the losing end of a trade, a position that you felt had wonderful possibilities, and then heard your inner voice say, “I think I will just have to be patient with this one just a while longer in order for the market to turn in my favor.” Or maybe you were on a winning trade, but fighting your impatience to cut it off and bank your winnings, only to exit right before the momentum actually picked up and the trend continued with force.
These two panic scenarios plague every trader, but veterans truly understand the lesson of patience. They apply its principles in exactly the opposite way. If they hear a thought about extending a losing trade, they get extremely impatient and shut it down immediately. They know there is another opportunity around the corner. No need to stick with a loser one second more. As for winners, that is where patience is required. Trends tend to continue more than reverse. Be vigilant to search for confirmation that a reversal has truly occurred, and then exit. You will be right more times than wrong to your benefit.
#10 – Never ever throw good money at a losing trade.
If you jumped to this habit heading and skipped the last one, then go back and read #9. If that habit was obvious, then this one should be a “no brainer”. If you really take #9 to heart, then you will not find yourself in the predicament of trying to convert a losing trade into a profitable one. But how many of us have done this, only to mutter expletives at our screen while our account was decimated? It starts with removing a stop-loss order, and then continues when we add more to the position in a last ditch attempt to score enough on the reversal to offset our losses.
It is easy to relate to this scenario. Even veteran traders had to go through these pitfalls in order to learn their lessons. The lesson, as in #9, is to react in exactly the opposite fashion – add to your winners, but never add to your losers. If there is one mistake that causes the high casualty rate in forex trading (some say as high as 65%), then adding to losers might win the award for being the worst habit to live by. Put another way, if you are trying to breathe life into cadavers, then sooner or later you will pick up a fatal disease. That picture is a bit grizzly, but it does drive home the point.
#11 – Losing streaks happen, but stick with your game plan.
Losing streaks can happen, even to veteran traders. They are part of the environment, just like winning streaks, but, if you allow your confidence to be shaken after a few losers in a row, then you need to step away from the table. You need a process that will allow you time to pick yourself up, dust off, and get back into the game at the right moment. Successful traders know when to back away, but losing confidence is not an option.
When a losing streak comes and simple statistical averages say that it will, then accept it. Take the time to review your trading plan to see if it is best for the prevailing market conditions. As long as your plan is sound, there is no reason to be gun shy. When automated trading systems were in their infancy at big banks, the software was back-tested and unleashed with great success, but not without setbacks. When big losses occurred, no one lost faith in the “black box” approach. They refined their effort and went back on the attack. With a sound strategy, learn to forget losing streaks or trades that went awry, and to focus on your next opportunity at hand.
#12 – Always know that there is always another opportunity around the corner.
Have you noticed that patience applied wisely is really the theme of most successful habits? Many newcomers to trading, that is after leaving their day job, believe that their new job is to master a given number of trades each and every day. They put pressure on themselves to place positions, as if quantity is the name of the game. “Isn’t that what day trading is about”, they will say, but this behavior is the exact opposite of what true patience is all about. As John Wooden, a famous basketball coach at UCLA, would say, “Never mistake activity for achievement!” Veterans understand that activity is not trading for success. They do not feel pressured to get into the market or filled with regret over a previous mistake. They know that market forces will change. New opportunities will arise. Just be patient.
#13 – Learn from books on the wisdom of crowds and herd mentality.
Veteran traders do read books on a variety of topics and try to keep up with the latest ideas. There is always a new book on the bookshelves about technical analysis or that explains unique ideas on trading strategy. The Internet is filled with information, as well, but it is easy to get information overload and to lose focus. At the end of the day, however, most all veterans agree that price action is the only thing that matters, and the best way to get a handle on what drives human behavior in the market is to study books on crowd psychology.
Emotions drive market action, something veteran traders learned and accepted long ago. Their passion is to discover how human greed, fear, and panic translate into supply and demand forces that impact price and make price king. When you observe rioters in the streets in Greece, you can identify with the human emotions that will soon move the Euro in one direction or another. The more that you educate yourself on the intricacies of crowd mentality, the more you will make sense of the madness of the market.
#14 – Buy into strength and short into weakness.
The last bit of advice from successful traders is to focus once again where the probability of gain is the highest – go with the meat of a strong trend, the central portion of the ride. Wait for it, and capitalize on it. If the move is down, then short, or in other words, do not fight the tape. You do not have to be an expert at picking tops and bottoms. There has never been one, in case you are curious. If there is a strong market reaction to a news release or event, then you might want to consider fading an over reaction, but this situation is the only time to be flexible on your rules. The trend is definitely your friend!
And there you have them – fourteen habits of highly successful and wealthy traders. Try a few on for size and see if they fit with your style. We did not promise that these habits would be filled with surprises. Most of them are pure common sense that leverage on your ability to be patient, to read the psychology of the herd, and to capitalize where you have the greatest potential. Veteran traders have gotten wealthy using these bits of wisdom. Now you can, too!