Nothing in trading works all the time, but it is probably not an accident that so many efficient market veterans adhere to the following habits and rules when developing a trade plan. Consider incorporating some of these habits when approaching market risks.
Research and practice
Successful traders are continually practicing and refining their trading psychology. Back-testing and paper-trading are the flight simulators of trading. They let you build, test, and re-test, whatever your trading approach may be. Logging time with simulated trades will help condition you to remain consistent when the market may not be. Successful traders make or lose money by design—not by accident.
Balancing risk rather than chasing profit
Successful traders are good managers of their money and the risks of the market. Those same markets have a way of punishing those that aren't. Seasoned traders establish their exit point as well as their target profit point before entering a trade. Good traders make sure that their risk in any trade, or group of trades, will not derail them financially or psychologically. People only lose the farm if they bet it in the first place. A reasonable trade plan should include a balance of risk and reward. Establish reasonable expectations for a targeted rate of return. Learn to distinguish between successful trading and luck.
Plan the trade and trade the plan
Following established rules may help you survive and thrive in the market. No set of rules works every time, but they are the compass that helps you navigate the market's stormy weather. It is important to plan each step of each trade and then actually execute the plan. People who trade without specific rules and a clear plan, or those that have rules and plans they don't really follow, are at the market's mercy. Good traders follow their rules and trade their plan.
Approach trading methodically
Many successful traders use checklists as a tool to help them validate that they are thinking through their trading decisions, rather than reacting impulsively to market fluctuations. A best-selling book titled The Checklist Manifesto, by Atul Gawande, supports this idea. Based on research conducted primarily in hospitals, its central finding was that failure is more closely a result of ineptitude (not properly applying what we know works) vs. ignorance (not knowing enough about what works).
We've talked about the importance of a plan. Once a plan is in place and has been tested, it needs to be followed. When evaluating your plan, look for the following three characteristics.
- Consistency—Is what you're about to do consistent with your trade plan? Consistency is critical because it helps us track and potentially improve performance. How can you isolate what's not working if each trade has its own set of rules? Consistency gives you a much better chance to replicate what is working and to adjust what isn't.
- Efficiency—Are you filtering and managing data in an efficient way? Are you maximizing the tools available? Limited time exists to filter market information and there are thousands of possible opportunities. It is important to find rules and tools that will help you reduce the market to a manageable size and identify opportunities.
- Objectivity—Are you staying true to your plan? Let your process dictate your actions. Without this direction, emotion may begin to influence your decisions.
Trade with the trend
Many traders follow a trend that is already in place and ride the wave as far as they can. This, in and of itself, influences the market. Others work hard to predict the beginning of the next big trend or try to pick the top or the bottom of the market. Sometimes going with the crowd makes sense. Following an established trend, while carefully managing downside risk, is favored by many well-known traders. An old adage of floor traders is, "The trend is your friend."
These are just a few habits embraced by seasoned traders. It is important to remember that many 'good habits' are simple enough to understand, but not necessarily easy to always practice. Over time, you may develop other habits that support your trading strategy. You may wish to write them all down and even keep them in a visible place.
Successful trading is not so much about what you thought or how you felt, but what you actually did that makes the difference. Market sage Warren Buffet famously said, "The chains of habit are too light to be felt until they are too heavy to be broken." So, choose your habits wisely.