Many people aspire to be traders when they see the potential for making large sums of money. Money attracts interest in any field whether it is practicing law, medicine, or entrepreneurship. However there is a huge distance between wanting to be something and doing the work to achieve a professional goal.
It is generally accepted that approximately 90% of active traders are not profitable. To be a profitable trader you have to make money, this will put you in the top 10%. A profitable trader has an edge over other market participants by using a quantified rule based system and managing risk while maintaining discipline and consistency. These dynamics are the price of entry to being a trader. Few people will maintain these four things.
Now what about the truly great traders? If you wanted to become great at trading the first step would be to study the great traders that have documented and verified records trading huge amounts of money over long time periods. There are market wizards and trend followers that have proven their greatness through results. Also, many of these great traders have written their own books explaining the principles that lead to their success. A trader doesn’t have to try to figure out the path to trading greatness all by their self as they can study great traders.
In my own study of legendary traders both of the past and present and reading over 400 trading and investing books here are the ten most important principles I have found common among the majority of these great traders.
- Great traders go all in on trading as their way of life. They don’t dabble, it is their career, their favorite hobby, and a passion. They enjoy the game and their success. Loving what they do creates the energy they need to do the work and become a huge success.
- Great traders focus on risk first and build their trading methods around the dangers of losing money. They trade in ways to minimize their losses when wrong through position sizing and stop losses.
- Market wizards are mentally flexible in their trades and not afraid to admit they were wrong and exit a position or even reverse the direction of their trade when the markets show a new signal.
- Trend followers trade diversified markets using systems with an edge that simply capture trends or cut losses short to create profitability through large wins and small losses. They don’t predict the future they react to current price action to navigate volatility and capture the primary part of a trending market.
- Great traders focus on the risk/reward ratio on any trade looking at what they will lose if the trade doesn’t work out versus what they will make if the trade does work out in their favor. Profitable traders like at least a 1:2 or 1:3 risk to reward ratio but more is better. They focus on this dynamic more than win rate percentage.
- Almost all great traders of the past and present had the ability to cut losers short and let winners run.
- Great traders use position sizing metrics, stop losses, diversified signals, and market diversification to eliminate the probability of the risk of ruin over a large sequence of trades.
- Almost all great traders had a personal mentor early on in their career or at least read a lot of the best trading books.
- They identify as traders, that is who they are. So they act and behave in accordance with their belief system. They have faith in their strategy and in their self to execute it with discipline.
- Great traders have found their own personal edge over other participants in the market. A technical trading edge is the ability to understand a condition or conditions in the markets that will evolve in some non-random way over a defined time frame. A mathematical trading edge is to have a good risk/reward ratio through trade management, and a mental edge is the discipline and perseverance to trade a profitable system over the long term.
To be a profitable trader you have to first be in the top 10%. To be a great trader you have to then be in the top 1% by doing what the other 99% percent simply will not do, which is the hard work, the perseverance, and the ego control.