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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

Sun Tzu – The Art of War

The Oldest Military Treatise in the World!

The Principles of Warfare:

Calculations!
Sun-tzu said:

Warfare is a great matter to a nation; it is the ground of death and of life; it is the way of survival and of destruction, and must be examined.

Therefore, go through it by means of five factors; compare them by means of calculation, and determine their statuses:

One, Way, two, Heaven, three, Ground, four, General, five, Law.

The Way is what causes the people to have the same thinking as their superiors; they may be given death, or they may be given life, but there is no fear of danger and betrayal.

Heaven is dark and light, cold and hot, and the seasonal constraints.

Ground is high and low, far and near, obstructed and easy, wide and narrow, and dangerous and safe.

General is wisdom, credibility, benevolence, courage, and discipline.

Law is organization, the chain of command, logistics, and the control of expenses.

All these five no general has not heard;
one who knows them is victorious,
one who does not know them is not victorious.

Therefore, compare them by means of calculation, and determine their statuses.

Ask:

Which ruler has the Way.

Which general has the ability.

Which has gained Heaven and Ground.

Which carried out Law and commands.

Which army is strong.

Which officers and soldiers are trained.

Which reward and punish clearly, by means of these, I know victory and defeat!

A general who listens to my calculations, and uses them, will surely be victorious, keep him.

A general who does not listen to my calculations, and does not use them, will surely be defeated, remove him.

Calculate advantages by means of what was heard, then create force in order to assist outside missions.

Force is the control of the balance of power, in accordance with advantages.

Warfare Is the Way of Deception:

Therefore, if able, appear unable, if active, appear not active, if near, appear far, if far, appear near.

If they have advantage, entice them;
if they are confused, take them,
if they are substantial, prepare for them,
if they are strong, avoid them,
if they are angry, disturb them,
if they are humble, make them haughty,
if they are relaxed, toil them,
if they are united, separate them.

Attack where they are not prepared, go out to where they do not expect.

This specialized warfare leads to victory, and may not be transmitted beforehand.

Before doing battle, in the temple one calculates and will win, because many calculations were made.

Before doing battle, in the temple one calculates and will not win, because few calculations were made.

Many calculations, victory, few calculations, no victory, then how much less so when no calculations?

By means of these, I can observe them, beholding victory or defeat!

*** If you think that war has casualties then …

What do you think about day trading in stocks?

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Mar

05

2010

U.S. Said to Tell Hedge Funds to Save Euro Trading Records

The U.S. is asking hedge funds not to destroy trading records on euro bets, according to a person with knowledge of the requests, as Europe and the U.S. step up scrutiny of the funds’ role in the Greek debt crisis.

The Department of Justice sent requests to save the records to at least some of the hedge funds whose executives attended a dinner hosted by New York-based research and brokerage firm Monness, Crespi, Hardt & Co. on Feb. 8, said the person, who declined to be identified because the information is private.

The European Commission said yesterday it will investigate trades in sovereign credit-default swaps in the wake of the Greek crisis, which has pushed the euro lower and prompted officials to warn hedge funds they shouldn’t try to profit from the woes of the region’s nations. One of 23 themes discussed at the Feb. 8 dinner was a wager that the euro would fall against the dollar, according to an agenda obtained by Bloomberg News.

“It is clear in the current environment, and likely for a long time going forward, any entity that profits from another’s misfortune, in this case hedge funds versus Greece and the euro zone, risks being the target of public backlash, or worse, government retaliation,” said Kirby Daley, a senior strategist in Hong Kong with Newedge Group’s prime brokerage business.

Aaron Cowen, an executive at SAC Capital Advisors LP, David Einhorn, head of Greenlight Capital LLC, and Don Morgan, who runs Brigade Capital Management LLC, attended the dinner, as did a representative from Soros Fund Management LLC, the Wall Street Journal said Feb. 25.

Greece’s Woes

Spokespeople for the hedge funds declined to comment or didn’t return calls seeking a comment. Neil Crespi, president of Monness Crespi, couldn’t be reached for comment. Gina Talamona, a Department of Justice spokeswoman, declined to comment. The requests were reported earlier yesterday by CNBC.

The premium investors demand to buy Greek government debt over comparable German bonds, the European benchmark, rose to 396 basis points on Jan. 28, the highest level since the start of the euro in 1999, making it more expensive for the country to sell new bonds. Sovereign credit-default swaps, used to insure against default, rose to a record last month.

European official have said the contracts can fuel speculation that may distort market perceptions. The German Finance Ministry said this week the over-the-counter products must be reviewed following the reaction of financial markets to the Greek debt crisis. French Finance Minister Christine Lagarde has said she wanted politicians to take a united approach against “speculators” betting on government bond defaults.

Record Bets

U.S. politicians plan to hold a hearing on the role that investment banks including Goldman Sachs Group Inc. may have played in Greece’s debt crisis. Federal Reserve Chairman Ben S. Bernanke said on Feb. 25 that the U.S. central bank is reviewing derivatives contracts arranged between Goldman Sachs other investment banks with Greece.

The woes of Greece, which has to finance the euro region’s largest budget shortfall, and concern they may spread to other countries have dragged down the euro, which has tumbled 11 percent since Nov. 25. It traded at $1.3613 at 8:09 a.m. in Tokyo.

Futures traders last week placed the biggest bets on record that the euro will fall against the dollar. The number of wagers by hedge funds and other large speculators for a decline in the 16-nation currency rose on Feb. 23 to 71,623 contracts more than those anticipating a gain, according to Commodity Futures Trading Commission data. It was the fourth consecutive week that the amount climbed to a record.

Even if the Department of Justice decides to request the records it has asked the hedge funds to save, that doesn’t necessarily mean that the managers will be investigated, said Jedd Wider, a partner at law firm Morgan, Lewis & Bockius LLP.

Bullish on Canada

Other ideas discussed at the dinner, which took place at the Townhouse, a private facility run by restaurant Park Avenue Winter, were bullish bets on the Canadian dollar and Philip Morris International and bearish wagers on Wells Fargo & Co. and Bank of America Corp.

“The big issue is whether the meeting was informational, and these various traders were simply responding in a parallel way to a common set of facts,” which would be legal, said Herbert Hovenkamp, who teaches antitrust law at the University of Iowa College of Law in Iowa City. “What’s not legal is for people to agree to trade at a particular price or against the euro to devalue it and start a stampede that devalues it further.”

Rejecting Speculation

Louis Bacon’s $14.6 billion Moore Capital Management LP and Brevan Howard Asset Management LLP, Europe’s largest hedge-fund firm, have rejected speculation they’re trying to benefit from Greece’s woes.

Bacon told investors in a Feb. 19 letter that he isn’t betting on a Greek default because European authorities will probably bail out the country. Moore has a net long duration position in Greek bonds, meaning it will benefit from a uniform decline in interest rates across the yield curve.

Brevan Howard said in an investor letter for the $22 billion Brevan Howard Master Fund that it hasn’t been betting against Greek debt since mid-December and has “no meaningful positions” through bonds or credit default swaps in Greece, Italy or Portugal.

Mar

03

2010

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