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The Seven Secrets of the Highly Successful Trader

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1. TAKE COMPLETE RESPONSIBILITY

The successful trader knows that every action he takes is his/her action. You will never meet a successful trader who is looking to blame someone or something else for his or her losses.

This is a critical step in understand how to become a successful trader because until you take complete responsibility for all of your trades, you will never feel comfortable with your system and you will never reap the rewards.

Additionally, when something goes wrong with a trade or an investment endeavor, the traders who take complete responsibility for their actions will look at those “failures” as learning experiences.

The trader who takes responsibility will try and determine what went wrong and what needs to be done in order to avoid similar mistakes in the future. The trader who does not take complete responsibility will simply say “the market wasn’t right” or “my broker is an idiot”.

That trader will likely make the same mistakes again and will never understand why he/she cannot win in the stock market. This step is critical.

Before all else, you must accept everything that you do as your responsibility. The game can only be won out of luck if you don’t follow this first step.

2. HAVE A SYSTEM THAT FITS YOU

Every successful trader, investor, money manager, etc. has a system that perfectly fits his or her ideals and personality as an investor. The system really doesn’t matter, it’s secondary.

Value investors like Warren Buffet have made millions with their value approach. Day traders have made millions with their system.

I have colleagues who have made millions with momentum investing. So it can’t be the system per se. Instead, it’s the fact that those winning traders have discovered and developed the system that fits them best.

If you are a very worrisome person who absolutely cannot take losses without getting ulcers then I would not suggest day trading as part of your system. On the other hand, some investors would go crazy if they had to buy a stock and hold on to it for a year or two.

So how do you find a system that works for you? You have to work backwards by discovering what your objectives are.

What annual rate of return are you looking for?

Do you want to trade full time or just leisurely?

Would you get stressed with daily gains and daily losses?

Are you extremely patient with your investments?

Do you need to make lots of decisions?

Which trading systems do you know and feel comfortable with?

How much research have you done?

There are so many questions to ask yourself because it is absolutely vital that you choose a system that really works for you.

If you are not comfortable with your system then you will always be tempted to break your rules. Your health will likely suffer as much as your portfolio.

3. PLAN A TRADE AND TRADE A PLAN

The point of this rule is that you must develop a system that is right for you and then stick to it no matter what. As a result, your plan must be able to cater for every eventuality.

Once you put your money down then you no longer can control what happens. You won’t know what the prices will do so you can’t worry about anything except following your plan.

What will your entry be?

What will your exit be?

What happens if there is a merger?

What happens if the price gets close to your stop order?

Do you see what I’m getting at? You don’t want to have to answer these questions AFTER you put your money down! You want everything to be automatic by that point.

So make sure that your system plans for everything. Then you just need to follow your rules and you won’t have to think (or stress) at all.

4. WORK HARD AT LEARNING HOW TO TRADE PROPERLY AND KEEP WORKING

In other words, once you have put the time and energy into determining your system, your work is not done. You have to constantly evaluate and assess your system via education.

Now, I’m not saying that you have to worry about your plan every time you make a trade. That would contradict Secret number 3!

What I’m saying is that if you were a brain surgeon would you stop learning new techniques and new technology after you finished your internship? I certainly hope not!

Hopefully, you’ll keep educating yourself so that, at minimum, you can keep up with the changing times. At maximum, you keep improving until you become one of the best.

Keep learning … even when you think you know everything there is to know about investing.

5. POSITIVE SELF-BELIEF

The top traders know that it is the discipline displayed in following their rules that make all the difference. If you do not believe in yourself and your system then you are going to have difficulty following your rules.

Following your rules is the most important aspect of successful trading. But even if you do follow all your rules, if you are constantly doubting yourself then you aren’t going to have any fun at all, plain and simple. You will be miserable.

Although this step is important, it should come naturally if you follow the other rules because positive self-belief can be obtained through repetition and success.

If you follow your rules and continue to strive towards developing and sticking to your system then the success of your plan will likely improve your belief in yourself and your system.

If you are not believing in yourself then there may be a problem with your system … it may not be suited for you.

6. VIEW TRADING AS A SCORE IN POINTS AND NOT MONEY

Simply put, forget about the money. Follow your rules and pretend you are playing with chips. Be happy that you stuck to your rules and are winning the game.

But if you think too much about the money then the losses will eat you up. You have to look at the big picture and the best way to do that is to forget about the money.

In action terms, it means to stop looking at the newspaper every morning to see if your stock has gone up or down.

If it hasn’t triggered one of your actions (like exit or another entry) then don’t worry about it because it doesn’t concern you until action is required.

If you stick to your rules then you really shouldn’t even need to know anything about your stocks or your money until action is required (and even then you can automate most of those processes).

The top traders never saw their trading as a cash box. They were either running a business or playing a game.

It just is not possible to become a top trader if you view every single tick in the market as money lost or money gained.

7. KEEP TRADING AS PART OF A BALANCED LIFE

This is an extension of Secret #6. Trading is stressful no matter who you talk to. Money is stress. So do everything you can think of to eliminate this stress. You will be happier and you’ll be more successful.

I have met hundreds of successful traders and one thing they all have in common is their lack of stress. They all have hobbies, families, friends, sports, and leisure activities that allow them to follow their rules without stressing about every move. It’s amazing!

I explain the stories in my book but I can tell you right here that my trading results went through the roof once I took a break from trading to pursue other activities.

For years I thought I needed to spend every waking hour thinking about and developing my trading career. I became so stressed when the results were poor and so happy when the results were good.

It was a roller coaster of emotions and stresses. I needed a break so I took a sabbatical for several months (but I left my rules intact and on auto-pilot with my broker).

I returned to the best results of my career. I realized that my constant presence was only hurting my chances.

From that point on I realized that I needed to make trading only one (of many) facets of my life.

Mar

10

2010

Buy Low and Sell High

There is an important financial measure called “opportunity cost.”

Basically, this means that if you spend money on something you automatically lose the opportunity to spend it or invest it on something else.

Or, as my Grand Dad used to say:

“You can’t spend the same money more than once!”

Over time, the stock market has outperformed all other types of investments, including bonds, bank deposits, government securities and mutual funds.

The stock market may not always seem rational, but it’s usually right in the long haul.

Over the short term, the market moves based on enthusiasm, fear, rumor and news. Over the long term, though, it is mainly earnings and dividends that determine whether a stock’s price will go up, down or sideways.

A good stock may go up even when the market is going down, while a stinker can go down even when the market is booming.

Some days stock prices make absolute sense. Other days they seem ridiculously expensive or extremely cheap.

The key to investing is to determine which is which on any given day, and then take advantage of it!

Prices are set by where a company appears to be going, not where it”s been. Investors buy stocks with the expectation that they’ll be able to sell them for higher prices at some time in the future.

That means they expect that earnings will likewise grow. And if they don’t, the best past performance in the world isn’t going to help.

Historically, a well managed and widely diversified portfolio of correctly selected stocks has produced substantial returns with relatively modest risk!

“Buy Low and Sell High” or,

“Buy High and Sell Higher!”

We all heard the above simplistic bits of advice. Unfortunately, as market cycles move up and down, and security prices rise and fall, it’s hard to pinpoint the precise time when it’s the most advantageous for either transaction.

One way to weather market cycles more successfully is with disciplined, periodic investing, often termed cost averaging. This simply means putting an equal amount of money at regular intervals into one or more securities.

Periodic investing can be an easy way to build up your portfolio! Employ this technique by setting aside a fixed amount of savings every month to invest.

When you invest the same amount every time, you buy more shares when the prices are low and less when the prices rise. The result:

You can potentially lower your average cost per share.

Investments allowed to grow over time can increase in value surprisingly fast. The systematic re-investment of stock dividends can be a painless, automatic way to build up a sizeable “nest egg.”

The re-investment method creates a really powerful compounding effect on investments.

This is reflected in the words of Einstein, who once said that, the “Eighth” wonder of the world is compound interest!

Mar

09

2010

Value Investing

Value investing claims that the stock market sometimes undervalues a stock’s true worth, as revealed by financial information.

The theory claims that the market is slow to react, but in time it will eventually assign a value that accurately prices a security.

A value investor (see Value Averaging) looks for a stock that is trading at or below what it really is worth.

Why it’s important to know about this?

There are two distinct ways to determine if a stock is trading too cheaply:

1. One way is to compare the stock with other stocks.

Usually the markets run in cycles. If everyone is currently buying technology stocks, perhaps they are selling bank stocks.

Bank stocks might be sold off more than what they should have, which could result in giving the savvy investor an opportunity to find a good value in a stock (within a sector) that is currently unloved.

Look at the ratios: If a technology stock and a bank stock both grow earnings 15% a year, but the technology stock is trading at a P/E ratio of 30 and the bank stock’s P/E is 20, it looks as if the bank stock is cheaper.

2. The other way an investor might spot value is to know something about the company that he doesn’t believe is factored into the price.

AAA company coming out with a new “Miracle Product.”

ABB company owns real estate worth several billions that is not reflected properly on the balance sheet.

XYZ industry being deregulated promising more mergers and acquisitions.

The advantage to this strategy is usually less volatility and less downside risk if the markets start to fall. The biggest criticism of value investing is that it often times doesn’t provide instant gratification.

Many investors want to see their stock double within weeks of buying it. On the other hand …

Value investors often have to wait for a lot longer than that!

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Mar

04

2010

MEMBERS ONLY SECTION! “Trader Talk” is now LIVE!

Our highly anticipated Members Only section is now live!

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P.S. – We will be updating the “Trader Talk” page a lot throughout the next couple of weeks to get all of our data up there, so be sure to check back often!

Feb

09

2010

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