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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

ICBC Plans No Fund Raising; Loans Jump to Record in 2009

Industrial & Commercial Bank of China Ltd., the world’s largest lender by market value, said it has no fund-raising plan at the moment even as it boosted lending by 24 percent to a record last year.

ICBC’s capital adequacy ratio is “sound” and the highest among rivals, and pressure on capital raising is “not big,” President Yang Kaisheng said at a press conference in Beijing yesterday.

China’s banks doled out a combined 9.59 trillion yuan ($1.4 trillion) in new loans last year, helping the government engineer a turnaround in the world’s third- largest economy. The credit binge drained lenders’ capital and sparked concerns about asset bubbles, a higher number of bad loans and increased inflation pressure.

China’s publicly-traded banks have already raised about 131 billion yuan from bond and share sales since the second half of last year to replenish capital drained by loan growth, and they have announced plans to raise a further 127 billion yuan, according to Bloomberg data.

Beijing-based ICBC’s capital adequacy ratio, a measure of the bank’s financial strength, fell to 12.60 percent at the end of third quarter, from 13.06 percent at the end of 2008.

The nation’s policy makers aim to avert asset bubbles and restrain inflation by limiting new credit at 7.5 trillion yuan this year. China’s growth accelerated to 10.7 percent in the fourth quarter, the fastest pace since 2007, and property prices climbed the most in 21 months.

Boost Financing

ICBC said it will boost financing to projects already under construction and to small-and-medium sized firms and cut loans to new projects that are not government-backed and if they’re energy-intensive or polluting. Loans would also be reduced to sectors with overcapacity, Yang said.

Loans by the bank this year will be less than in 2009, Yang said. ICBC’s new loans were 1.03 trillion yuan last year, Yang said. That’s a record, according to calculations based on Bloomberg data.

After a government bailout five years ago, ICBC is now the world’s biggest bank by value. The lender has more than doubled profit during the past three years and has more than 16,000 outlets nationwide and 112 branches outside China, and 190 million personal customers — equivalent to the populations of Russia and Canada combined.

ICBC on March 4 submitted a tender offer to buy all shares in Thailand’s ACL Bank Pcl in a deal that would give ICBC a foothold in the southeastern Asian nation after acquisitions in Indonesia, Macau, South Africa and Canada since 2007. The bank aims to triple the share of profit coming from abroad to 10 percent.

ICBC will be “active and prudent” with overseas expansion this year, Yang said.

Mar

07

2010

Stocks and Stock Market Gaps

A “Gap” is a term used to describe the condition when a stock opens at a higher price than it closed the prior day.

The word gap refers to the space that is left in the daily chart. It is the “empty space” from yesterday’s close to today’s open.

Gaps can be either up or down and they can happen to all stocks and in all stock markets.

Gaps are measured from the prior day’s closing price to the current day’s opening price. The post market activity and pre market activity do not affect the gap.

Stocks can trade after market hours, and at pre market starting, but these are not considered “normal” market hours.

For example, stock X closes at 7.00. It trades in after market hours up to 7.50. The next day it starts trading at 7.20 and trades up to 7.60. Later in the day the stock is all the way down to 7.10.

The “Gap” as we measure it is only 20 cents (7.20 – 7.00). All those post and pre market trades do not matter. The stock traded, and people made and lost money, but the gap is not affected!

What causes gaps? Usually it is news driven. Individual stocks can gap up or down due to news such as earnings reports, earnings pre-announcements, analyst’s upgrades and downgrades, rumors, message board posts, key people in the company commenting, buying or selling the stock.

Groups of stocks or the whole market may gap-up or gap-down due to various economic reports, news on the economy, political news, or major world events. These news can cause many individual issues to gap with the market.

Many stocks can move very closely with the market and others may be in the sectors that are mostly affected by the news.

Whatever the exact reasons, gaps are the result of some kind of events happening while the market is closed. The result is the buying or selling pressure at the opening of the next day, that will make the stock open at a different price than the one it closed.

Why are “Gaps” important?

This sudden move by a stock, the sudden change in demand, is often the beginning of a major move.

There are i.e. swing trading strategies that capitalize on entering after a gap, and other tactics like i.e. momentum trading that capitalize on several days moves after a gap.

Feb

19

2010

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