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Page 1: Seven Habits of Highly Successful Traders

Seven Habits of Highly Successful Traders

Jared Erni 12/18/2008

There is an unlimited amount of information in book and on the internet on how to be successful in the markets. Some information is good, and some is mediocre advice at best. One of the most inspiring books I have read is Steven Covey’s bestseller Seven Habits of Highly Effective People. Although his book doesn’t specifically address trading, Covey’s list of habits of the most successful and effective people in the world draw a strikingly similar relationship to the habits and attributes I have observed behind successful traders. The following is my take on the Seven Habits of Highly Successful Traders.

1. Be proactive. Why is it that most traders lose money? One simple answer is that most traders are “reactive” rather than “proactive”. So what does this really mean? Well, being reactive means we tend to blame other people or circumstances for our obstacles or problems. As clearly stated by Scott Walker (2004), founder and instructor of KISSystem, the successful trader knows with every action he takes, and with every decision he makes, he and only he is responsible for that action.

The reason being proactive is so important to trading is this: when you accept one hundred percent responsibility for all your actions, you close the door to excuses and open the door to learning. When something goes wrong, instead of looking for someone else to blame, you will accept responsibility (Walker, 2004). Bruce Babcock (1999), renowned trader and author, states that blaming others for our failures is an easy trap to fall into. No matter what happens, you put yourself in the situation; therefore, you are responsible for the ultimate results. To be a successful trader, you must take full responsibility of all aspects of your trading. By doing this, you are empowering yourself to learn from your mistakes, and you will learn to never repeat those mistakes, which is vital to a winning trader’s success. Learning from experience, and learning from mistakes (as long as you don’t repeat them) makes you a progressively better trader. By not accepting responsibility for your own decisions, you are hurting your future success.

2. Begin with an end in mind. This simply means that you first plan the trade and then trade the plan. If a trader doesn’t plan every trade, there will be no long term success. Why? Because by planning a trade, you take the emotional part of worrying about where the prices are going and replace it with a focus on the systematic actions you will take when the price hits your pre-determined trigger points. By planning the trade first, you allow yourself to psychologically accept the risk you are taking before you enter the trade. You should already know what would cause you to enter a trade, add to a trade, what your stop-loss will be, what trailing stop you will use, and what your exit strategy will be before you enter.

One point that beginners must understand is that the market will always do its utmost to throw you of track. Once in a trade, it is a lot like riding a wild horse (Walker, 2004). The prices will

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thrash around shaking off all the emotionally scared, leaving only those with the discipline to follow a plan to fully benefit from the trade.

Planning a trade should be no different than planning for the unexpected on a trip. When you know what you are going to do when your trade runs your way, turns sideways, or goes against you, you can act accordingly with a focused mind leaving emotion on the table. To win in the market, you must learn to trade without reacting to emotion. The only way to do this is to develop the discipline to plan your trades and then trade your plan.

3. First thing first. What is the first thing you did when you decided you want to start trading? You probably did some online research, talked to some friends or colleagues who trade, maybe bought a book or two. This is all very good and it is setting up a foundation; but, there is one step that is commonly overlooked that bridges the gap between gaining an education about the markets and opening your first trading account. If you skip this step, your trading experience could end very disappointing and with frustration. What is this important step? You need to find a system that works for you.

I know it sounds like simple common sense, but can you believe that many people really disregard it? In their eagerness to start trading, some never take the time to find the right system. What do I mean by “a system that works for you”? I mean you need to find a system or strategy that fits your personality and goals. You may ask, “How I can find a system that works for me without testing several of them?” Are you just following the same system your friend is using? Are you using the first system you read in a book, or are you really taking the time to discover a system that fits your personality? Before you can find a system that works for you, you need to evaluate yourself. Some simple questions you can ask yourself are:

What kind of personality am I? What kind of trading suits my personality? Am I more comfortable making slow, steady decisions with the patience for

long-term trading? Can I handle the fast-paced stress of day trading? Do I like lots of action and making quick decisions? Do I want to trade full-time, part-time, or a few times a month? What annual rate of return do I want? What trading books have I read and which top traders do I admire most, and

why? Could I easily copy their style of trading?

Strive to find a way of trading you will be comfortable with. If you begin trading a system that does not fit your personality type, you will never gain the confidence or the results to truly become successful; so spend the necessary time to get this step right. You will build the foundation for your trading results, and if your system is strong and compatible with your personality, you will also enjoy trading, which is very important.

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4. Think win-win. From Stephen Covey’s book, habit number four, “Think Win-Win”, means when he wins, I win too; but, how does this relate to the stock market? A friend of mine, who is a very successful trader, once told me that back when he used to be a stock broker, he used to think successful day-traders had some mysterious, inherent ability or natural-born gift to predict what would happen in the market. It wasn’t until years later that my good friend learned it doesn’t really take vast amounts of knowledge or an inherit gift to be successful in trading; however, you need to understand this one simple concept. You are a small, small, small player scooping up scraps and just along for the ride.

The market moves with the big boys, the institutional traders, because they are the ones with large enough capital to influence market movement. As a small retail trader, we do not have enough power to influence the market in the remotest way, so the trick is to understand what the big boys are doing and catch a little bit of the ride.

Much of technical analysis focuses on signals from patterns in the market. As you become accustomed to certain patterns through your practice, you will be able to recognize what the big boys are doing, and in a way get into their heads. When you begin to recognize these patterns and think like the professionals, you will be able to win when they win. Think win-win, and everyone gains.

5. First seek to understand. Being a consistent trader is really no different than becoming a top businessman, doctor, or lawyer. First, you have to really decide if you want to trade, then ask yourself is trading the market something you are genuinely interested in or are you just lured by the potential money it has to offer? The reason for this is because most traders go through years of trial and error, not to mention huge amounts of effort until they become successful. Why should we expect it to be any different for us? Successful trading requires not only a lot of ground work, but an on-going effort in order to stay at the top of your game.

Just as any top businessman, doctor, or lawyer spends years of intense studying before they reach the top of their profession, so must beginners approach trading. Don’t expect to make millions in your first month. Consider the first couple of years as going to a university. The stock market is the teacher and your initial account is your tuition fee. Once you have developed a trading system that fits you, and you have developed the discipline to follow your plan, then it is still a constant battle to stay on top of your trading.

How long does it take to become a competent trader? There is no set time frame, but does it really matter? What if it took you years? Would you be better off once you accomplished your goal? Absolutely! That is why it is so important to make sure you are genuinely interested in trading, not just lured by quick financial gain. When it comes to struggling, you need to stick it out and have the will not to give up. The rewards will come.

6. Synergize. Someone once said, “If you want to be successful, you must network with people who are successful”. You will not believe the added support and learning that comes from

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having a group of friends or like-minded people to discuss your experiences of trading with. The stock market is formed by large groups of people from all walks of life. Everyone is different, and therefore different people view the market differently (Yang, 2008). If we can associate with others engaging in the same experiences, we will learn from their goals, knowledge, and experiences as well as gain a whole group of support. This is the power of a TEAM (Together Everyone Achieves More).

There are hundreds of different support groups and trading clubs you can join. You can even form your own with people you know who are trading. By regularly joining with others, sharing experiences and benchmarking goals, you will speed up your learning curve and make you more successful in your trading efforts.

7. Sharpen the saw. Trading can be an extremely stressful career, so keep trading as part of a balanced life. When you are dealing with making and losing money based on your perceptions, the stress can be enormous. You must do everything in your power to eliminate the stresses.

It is easy to fall into the trap to spend all day, all night, weekends, etc. reading and studying the markets, especially for beginners. A beginner should spend more time in the beginning then later on down the road, but be reasonable. Work hard and play hard! Trading should be treated like any other business, working hard at it for a specified amount of time, then be disciplined enough to switch off and live your life (Walker, 2004). Taking time off allows you to charge the battery and gain some perspective.

Bruce Babcock (1999) said good trading is repetitive and pretty dull, so don’t depend on it as your primary stimulation in life. If you depend on trading for your major excitement, pursuit of fun will probably cause you to lose. I know people who have burned themselves out by not allowing themselves to balance their trading with other aspects of their lives. Trading can be frustrating, so keep it in perspective. Taking a break will help you come back with better insight, stronger motivation, and a fresh look. I have occasionally found that I even trade better when I trade three days per week versus five days per week, so figure out what that balance is for you and then use it to sharpen your saw.

My trading mentor explained the market to me with an analogy. He said the market is like a big apple tree surrounded by a mote filled with alligators. There is a bridge to get to the tree, but it is really rickety. Anyone can pick the apples if they can figure out how to get to the three, but only those with the guts and the right steps on the bridge make it to the other side. By practicing and applying the habits of highly profitable traders, you will better equip yourself to take the right steps across that bridge to real trading success.

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References

Babcock, Bruce. (1999). Commentaries by Bruce Babcock for both New and Experienced Traders: The Seven Habits of Highly Effective Futures Traders. Reality Based Trading Company. Retrieved on December 22, 2008 from www.rb-trading.com/article11.html

Walker, Scott. (2004). The Kissystem: The World’s Simplest Stock Market System. KISSystem.com.

Yang, KP. (2008). 7 Habits of a Highly Effective Trader. Invest Money Lab. Retrieved on December 21, 2008 from www.investmoneylab.com/general/general/7-habits-of-a-highly-effective-trader/

Bio:

Jared Erni learned to successfully trade the markets using KISSystem signals, developed and taught by Scott Walker, founder of KISSystem (Keep It Simple System). KISSystem is designed to teach beginners how to identify simple trading signals to succeed in the markets. To learn more, visit www.LearnToWinTrading.com.

<a href="http://www.learntowintrading.com">www.LearnToWinTrading.com</a>


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