“Plans are plans until they aren’t. Don’t confuse trading ideas with prophecy. You don’t know the future. Unless you cause it.” -Curtis Faith
This morning I went in very biased about buying Apple long, my mind was clouded with the support level of the 50 week moving average holding up perfectly yesterday and in the pre-market. Looked like a perfect play off the last support level that held up for years. My love for the products did not help me think more clearly. I came in biased. I even wrote a special morning blog to explain my set up. One of the best professional money managers and a great prop trader commented on my blog post in the morning on facebook, and pretty much said I was wrong, dead wrong on that support holding. As the stock opened for trading I became flexible and aware of what happened in the past when I traded against those guys. Yes, Apple was oversold, yes it was far extended from the 5 day ema and due to return, yes it was holding at the 50 week ema, yes it has $100 per share in cash and the most innovative products in the world and a ridiculous P/E ratio of 12. But with a clear, cautious, and flexible mind ready to go long instead I shorted when it failed to make new highs of the day after opening and losing the 50 week line, then when it rallied back above it and failed again I doubled up. I used weekly in the money puts and ended up with very nice gains almost doubling my capital at risk in one hour. One thing that new traders have trouble with that seasoned traders do not is flexibility to change with the market. We have to identify a place the market can move that tells us that we are dead wrong no matter what our beliefs are.
In the markets there are many different types of traders and many motivations that drive them. Everyone has heard of different types of traders based on their trading method: Swing Traders, Day Traders, Momentum Traders, etc. But what about different types of traders based on their psychology, their purpose And motivation? Some trade for fun and excitement, others trade purely for ego. Others love the game and still others are in it only to make money. In the greatest game on earth it is surprising that many traders have different motivations, in reality the only correct motivation is to make money, that should be the real goal of any trader. Here are a list of ten types of traders I have observed on social media. We have all likely been more than one of these types at some time or another while trading. But we need to focus like a laser on the only real reason we should be trading: to make money and once we have made it, to keep it.
Greedy Traders: They trade too big and risk too much because their only goal is the easy money. They usually end up blowing up their account.
New Traders: They have no idea how the markets work so their only goal should be knowledge. New Traders do well to stay students until they have done their homework. Rushing in to make money without risk management, a winning method, the right mind set, and a trading plan will result eventually in failure 100% of the time.
Arrogant Traders: Their only goal is to prove they are right and satisfy their fragile egos. Arrogant traders will lie, delete tweets and posts, never admit when they are wrong. When they are wrong they will hide it under a cloak, when they are right they will scream it from the roof tops.
Trend Traders: Their only goal is to ride a trend and make money. Trend traders will buy high and sell much higher, they will short and cover much lower. They look like genius’ and prophets in a trending market either way it trends but they look like they can’t even trade in choppy or whipsawing markets. In the long term they do very well.
Scared Traders: Their only goal is to not lose their capital. Scared traders will immediately close losing trades and also immediately take profits. They are very stressed out in trading due to not understanding the nature of trading itself or just can not handle the uncertainty or risk. They either need to do their homework to develop their faith in or if they have done the homework trading may just no be for them.
Perma-Bull Traders: Their only goal is to go long stocks. Buy the best investment in the best stock.They have no desire to go short they always believe the next big rally is around the corner and love to buy lower and off support levels.
Perma-Bear Traders: Their only goal is to short stocks. They always think the market is on the verge of a major crash. They “know” the economy is in shambles and the markets are prone to fall. In a bull market they believe prices are too high and will reverse sharply. In a bear market they believe we will go much lower.
Prophet Traders: Their only goal is to rightly predict market movement then let everyone know they did. They always think they know the top or the bottom, they love targets and believe that charts show exactly what is going to happen next. They do not really discuss their own trading they just predict prices.
Paper Traders: They love the market and study more than anyone but never quite make the plunge into real trading. They stay in the comfy cozy world of paper trading and make it more of a hobby. They just can’t make the transition into the real markets.
Rich Traders: Their only goal is to consistently make money and grow their capital over the long term. They do not ask for tips, or advice, they did their homework and they trade their method. They maintain confidence in themselves and their methods regardless of whether they are winning or losing.
Trading is about following a method, system, or rules that give you an advantage over other market participants in the long run. There are good bets and bad bets. There are traders who follow a trading plan with discipline and others that start trading out of fear and greed after strings of losses or wins. Just because you lost money does not mean you made a mistake. Just because you made money does not mean you did not make a mistake. The goal of trading is to make money over the long term not be right every time. Losses are a part of trading. There is a big difference between a loss after following your plan versus a loss after a loss of discipline.
Losses are simply getting out of a trade with less capital than you entered it. The question is was the loss due to your method or your lack of discipline?
A mistake however can be many things, and mistakes can be profitable which is dangerous to the long term health of your trading account.
Trading a position size so big that your risk of ruin is inevitable is a big mistake whether your individual trades are a win or a loss.
Abandoning your method to start trading a different time frame or style than you have researched is a mistake because your edge is gone.
Adding to a losing position is a big mistake because eventually you will be in the trade that does not revert to the mean and you lose your whole account.
Believing that you are above your own trading plan and can start just trading as you wish is a death wish for your account.
Trading based on beliefs instead of reality is a dangerous place to trade and is a mistake.
Taking your entries a little sooner than they are triggered or an exit a little later than your stop loss is a mistake.
Diversifying traded markets or stocks before doing the proper research is a mistake.
Trading so big that your emotions interfere with your trading plan is a mistake.
Trading when you are very sick or going through emotional personal problems is a mistake.
Making trading decisions based solely on ego, fear, or greed is always a mistake whether you win or lose.
Like in the movie ‘Fight Club’ where there was a secret group of ‘fighters’ that loved what they did there is also a group of ‘traders’ in the market that love what they do so much that they win.
In the markets there is a club of traders that make up the 10% of winners that keep the profits over the long term that the other 90% lose in the short term. They trade differently than the majority. They use trading plans not hunches. Their #1 priority is managing risk not making profits. They trade to make money, not to impress anyone or prove they are right. They trade with passion, perseverance, and focus. They put in the time, they do the work, they can be knocked around by the market and still come back tomorrow for another trading day, knowing that all that stands between them and a lot of money is time.
1st RULE: You do not trade big position sizes against the WINNING TRADERS CLUB.
2nd RULE: You DO NOT trade big position sizes against the WINNING TRADERS CLUB.
3rd RULE: If someone “stops out” or loses more than their risk per trade, or hits their trailing stop loss the trade is over.
4th RULE: Only enter and exit a trade according to your trading plan.
5th RULE: Take it one trade at a time. (Do not get excited about the future of this trade or brood over your past trades).
6th RULE: No going all in, no predicting, just follow market action.
7th RULE: Winning trades will go on as long as they have to.
8th RULE: If you want to spend your time in the WINNING TRADERS CLUB, you HAVE to TRADE. (You have to get off the sidelines when you are ready and a great entry is there).
If you truly are serious about being a trader then there are seven things that you will have to accept.
You will have to accept that over the long term at best only 60% of your trades will be winners. It will be much less with some strategies.
Accept that the key to being a successful trader is having big wins and small losses, not big bets paying off. Big bets can lead quickly to you being out of the game after a string of losses.
Accept that the best traders are also the best risk managers, even the best traders do not have crystal balls so they ALWAYS manage their capital at risk on EVERY trade.
If you want to be a better trader then you need to accept that trading smaller and risking less is a key to your success. Risking 1% to 2% of your capital on any single trade is the first step to winning at trading. Use stops and position sizing to limit your losses and get out when your losses grow to these levels.
You must accept that you will have 10 trading losses in a row a few times each year. The question is what your account will look like when they happen.
You have to accept that you will be wrong, a lot. The sooner you accept you are wrong and change your mind the better off you will be.
If you really want to be a trader then you are going to have to accept the fact that trading is not easy money. It is a profession like any other and requires much work and effort and even years to become proficient. Expect to work for free and pay tuition to the markets through losses until you learn to trade consistently and profitably.
Trading is about math, ego control, risk management, psychology, focus, perseverance, passion, and dedication. If you are missing one, you may not make it. Trade wisely my friends.