Most of you must be familiar with Steven Covey's iconic book where he describes in details the "The Seven Habits of highly successful people". What emerges from the book is that successful people do not attain success by a stroke of luck alone. They have consciously imbibed some good habits which has made them successful. The same logic applies to a trader too. Nobody is born a good trader. You actually become a good trader by following a certain structure to your trading behaviour. We have identified 7 such interesting habits that can make you a successful trader in the markets..
1. Be passionate but be humble
The primary quality of a trader is combination of passion and humility. If you thing that you can become a good trader by dabbling with stocks in your free time, then you are sadly mistaken. It is absolutely essential to treat trading like a full-time job. You need passion, which is a state of mind. But passion alone can take you down the wrong path. What is equally important is humility when you are trading markets. A good trader is always a good student of the market and acknowledges that the market has the ability to surprise and disprove the best of traders. This humility is at the core of being a successful trader.
2. Be an optimist but keep your expectations realistic
You cannot be a trader if you are not optimistic. Even if you are in a hopeless situation, you must believe that there is a way out. A trader must always be hopeful that a combination of insights and discipline will eventually yield good results in trading. But it is also important to keep your expectations grounded and realistic. There are off days when you gain 10% in a single day and there are days when you lose 10% in a single day. Be realistic because both these events are outliers and are not going to happen frequently. Adjust your expectations accordingly.
3. Be patient, persist and learn from your mistakes
A good trader is someone who is willing to continuously learn from mistakes. As a trader it is inevitable that you will make mistakes in trading. The problem arises when you continue to believe that you are right. Smart traders usually grasp when they are wrong and are pragmatic enough to accept and move on. You cannot be egoistical and also be a successful trader. Unlike what a lot of people believe successful trading is not about skills and insights but more about patience and persistence. Once your trading plan is created, you must be patient and keep plugging away.
4. Discipline is key to successful traders
Oh yes, this is the golden rule of successful trading. You need to observe strict rules and discipline with respect to stop losses, profit booking targets, protecting your capital etc. In the long run, it is the disciplined trader who wins and not the person who is incredibly intelligent or lucky. Discipline helps you preserve capital and that is at the core of being a successful trader. If you take care of your capital then the profits will take care of themselves.
5. Focus on managing risk and protecting capital
This is in a way an extension of the previous point on discipline. A trader’s job is to manage risk. Don’t get obsessed with returns. Remember, you do not control returns. That is something the market controls. But you definitely can control the risk and that is what you should focus on. If you define your risk per transaction, if you create strong walls around your trading capital and if you always trade with a proper risk-return trade-off, you are likely to see success as a trader.
6. A good trader never panics
There is a popular saying in markets that you must always sell on greed and buy on fear. When you buy when the market is fearful, you will have to witness disruptions and sudden losses. Take that in your stride. A good trader never panics but sticks to his trading plan and execution discipline. Remember, the quantum of profits in the markets is finite. When you panic you are actually subsidizing the other trader who does not panic. In that case the profits will accrue to the other trader and the losses will accrue to you. The less you panic in difficult situations, the more likely you are to be successful as a trader.
7. Good traders never gamble, they focus on the odds
Many sceptics of trading often tend to equate trading with gambling, but that is far from the truth. A good trader will always trade on odds that he can control and take risks that can be managed. When you punt blindly in the markets you are actually gambling. Such individuals can never be good traders. A trader needs to understand the market situation, calculate the odds and then structure the trade. If you approach trading like a gambler, you will end up like a gambler.
These seven rules of trading are indicative and not necessarily exhaustive. Try to apply some of these rules in your trading activity. It will go a long way in making you a better trader in the markets!