What makes a great trader?
Marty Schwartz wrote once that “A great trader is like a great athlete. You have to have the natural skills, but you have to train yourself how to use them”. I couldn’t agree more.
Trading the financial markets is one of the most challenging professions in the world. You may think you have (or actually do have) the natural skills but unless you’ll learn to use them, and constantly train yourself, you’ll remain lost like the rest of herd.
Trading involves many skills – Technical skills, analytics, mental skills and management skills.
Among other things, a successful trader is also a designer (of the trading system), an analyst, the executioner (executing a trading plan), a risk manager, the accountant and the boss…
In trading you are your own boss… you are the business.
Not everyone can handle it and that is why only a few, The Elite, survive and make money from trading.
Learn from the best – 5 quotes from the very best
In order to become one of the Elite, there’s no better way than to learn from the best.
In this blog post I gathered 5 of the most insightful quotes that I’ve found, from the very best, and added my own personal interpretation to their sayings
“It takes 20 years to build a reputation and 5 minutes to ruin it. If you think about that you’ll do things differently” – Warren Buffet
Warren Buffet, the Guro of investing, isn’t a trader. In fact, his methods are far from anything related to trading. Yet I decided to add his quote to my post and ranked it at the top. Why is that?
The reason is because this quote’s message is so true and highly relevant to trading, investing and to life – The life of an entrepreneur… a life of a trader.
Most of us dedicate our lives to build ourselves from the ground up. Most of us weren’t raised with a silver spoon in our mouth.
We get up each morning, we hustle and grind our way up through hard work and, with a little bit of luck (never hurts), we start to see positive results and money flowing in.
That’s where Warren Buffet’s quote becomes relevant – Success often blinds you… It can mislead you from the path that brought you to it.
All it takes to lose everything you earned is one stupid mistake and a reckless behavior.
In the world of trading, what keeps us from being reckless is Discipline and by Discipline I mean proper risk management and proper capital management. Whatever you do, no matter how big and successful you may become, always remember that these are the two foundations that separate between staying successful and the hitting fast lane to square one.
I always think about losing money as opposed to making money. Don’t focus on making money, focus on protecting what you have – Paul Tudor Jones
This quote contributes and completes Warren Buffet’s message by elaborating and focusing more on Capital Management.
Paul Tudor Jones quote refers to times that a trader isn’t in sync with the markets. You need to realize that you can’t be always right and there will be times that you will experience some bad streaks (read more about bad streaks and how to handle them).
A bad streak is when you have a sequence of losing trades. It can be 3 losing trades in a roll… it can be 20. All you need to know is that statistically it can happen and it doesn’t matter how good you may you think you are.
In order to avoid bankruptcy in such times, Paul Tudor Jones advice is to always put more weight on capital preservation than on capital growth. The idea is that if you’ll manage to preserve your capital during the bad times, your capital will grow naturally during the good times.
That brings me to the next quote…
Taking calculated risks
“I have two basic rules about trading as well as about life… 1. If you don’t bet you can’t win…2. If you lose all your chips you can’t bet” – Larry Hite
This quote is one of my favorites. I relate to it so much that I even included it in my Home page screens. It is simple and yet very true and powerful.
The major difference between a trader and an analyst is that a trader actually needs to execute trades. Unlike an analyst that his job is to analyze charts and maybe provide some trading scenarios, a trader needs to put his analysis to the test by risking money. Taking a trading decision and knowing how handle with the risk and the emotional stress that comes with it is what separates between the men and the boys.
That’s what the first part of the quote refers to…
But it isn’t enough to have the guts to bet and execute your trading plan. Ignorant people have guts as well. The difference between successful traders and the rest is that successful traders make sure that when the opportunity emerges they will have the money needed to capitalize on it.
As a trader you constantly take on risks. Make sure that these are calculated risks and not stupid risks.
“Whenever I enter a position I have a predetermined stop. That’s the only way I can sleep at night. I know where I’m getting out before I get in. The position size on a trade is determined by the stop, and the stop determined on a technical basis” – Bruce Kovner
There’s a constant debate among pro traders about the use of stop losses.
Some insist that you have to have an actual stop loss order in place at any time and in any trade.
Some think that using an actual stop loss isn’t effective in times when stop loss hunting is growing and a use of logical stop loss is much better.
The common for both opinions is that A stop loss is always required at all times – The debate is about its form.
For me, the most significant part of Bruce’s quote is where he refers to the position size and how it is based on a technical basis – First set your stop loss (actual or logical… doesn’t matter) and then adjust your position size accordingly.
The idea here is that your stop loss should be set based on technical levels and not on the Dollar value of your acceptable risk (mistake that many do). When you set your stop loss based on the Dollar value of your acceptable risk you are actually setting your max fear level. How much pain you are willing to suffer for one trade. That’s not the way to set stop losses.
Your analysis should determine the size of your stop loss. Once you know where your stop loss should be then you can choose a position size that will fit your acceptable risk.
Psychology and probabilities
“To be a good trader, you need to trade with your eyes open, recognize real trends and turns, and not waste time or energy on regrets and wishful thinking” – Alexander Elder
People have a tendency to dwell on the past. Whether it’s a glamorous past, like a long streak of winners for example, or a painful experience like some big losses, dwelling on it won’t bring any good.
You can learn from past performance and you can evolve from it but your past shouldn’t affect your trading – Approach each new trade like it is the first one that you are taking:
- Do the analysis
- Prepare a trading plan
- Execute your trading plan
- Manage your risk
I love to compare trading to Poker. In Poker every hand you play has a random outcome and its own probabilities of success. Previous hands have no effect future hands or the outcomes.
In trading it is exactly the same – Each trade has its own random outcome and all you can do is to trade your edge and expect it to generate positive results over time.
Notice how none of the masters above mention quick wealth, holy grails and short cut to richness?
If you are a veteran of the financial markets you already know this… and if you are still a newbie you’ll learn it – There’s no shortcut to success in trading.
As mentioned above trading is one of the most challenging professions out there.
There are lots of fake gurus out there using demo accounts and fake results in order to lure you to buy their products with promises of instant gratification… Let me assure you, they do not last long.
The real masters of trading, the ones that stood the test of time, constantly tell us – Work hard, learn and focus on staying in for the long term.
Take the advice of the real masters…. Not from the InstaGurus.