THE
10 HABITS OF HIGHLY
SUCCESSFUL TRADERS
SUCCESSFUL TRADERS
1. Follow the Rule of Three. There are many indicators
a technical analyst uses to determine whether or not to
take a particular trade. There are patterns the price bars
make on the chart; there are moving averages of price;
there are various momentum and overbought/oversold
indicators as well. Together, these form a pictorial description
of where a stock’s current price is, relative to its price
history. My Rule of Three says that I will not enter any
trade unless I can carefully articulate three reasons from
among my list of technical indicators for doing so. Three
is the minimum, and more is better. So often young traders
take a trade for only one reason: a double bottom, for
example, or overbought stochastics. These indicators need
to be confirmed by others working in tandem. Conflicting
indicators signal a confused market. We don’t want that.
We want to enter on conviction, not confusion. So always
wait until you can satisfy the Rule of Three (at least).
Remember, trading is a game of probabilities, and you
should always stack the odds in your favor.
a technical analyst uses to determine whether or not to
take a particular trade. There are patterns the price bars
make on the chart; there are moving averages of price;
there are various momentum and overbought/oversold
indicators as well. Together, these form a pictorial description
of where a stock’s current price is, relative to its price
history. My Rule of Three says that I will not enter any
trade unless I can carefully articulate three reasons from
among my list of technical indicators for doing so. Three
is the minimum, and more is better. So often young traders
take a trade for only one reason: a double bottom, for
example, or overbought stochastics. These indicators need
to be confirmed by others working in tandem. Conflicting
indicators signal a confused market. We don’t want that.
We want to enter on conviction, not confusion. So always
wait until you can satisfy the Rule of Three (at least).
Remember, trading is a game of probabilities, and you
should always stack the odds in your favor.
2. Keep losses small. Bernard Baruch, the great Wall
Street speculator from the turn of the last century, once
said, “Even being right three or four times out of ten
should yield a person a fortune if he has the sense to cut
his losses quickly.” Baruch was right. It is important to keep
losses to a minimum, as most large losses started out as
small ones, and large losses can end your trading permanently.
Normally, we keep our losses small by setting stoplosses
on all open trades. We do this on all trades that we are not monitoring on a minute-by-minute basis; otherwise,
we will keep a mental stop in place and exit the position
once that price level is violated. Remember Warren
Buffett’s Rule #1: “Don’t Lose Money!” Buffett also made
a second rule: “Don’t forget Rule #1!” So take a tip from
the world’s greatest investor and always strive to keep your
losses small.
3. Adjust stops and targets at the end of the day. At the end of each trading day, on a high-watermark basis,
adjust your stop-loss or target price as needed. Here “high
water mark” means you adjust either the stop or target only
if the closing price sets a new high or low from the point
of entry. This is how it works: raise your stop-loss price at
each new closing high since entry (or new low if the trade
is a short). And if you are using a target price as an exit,
lower your target price at each new low if the trade goes
against you (or raise at each new high if short). Don’t get
complacent with your trades. Monitor them each day at
least once near the close, and adjust your stops and targets
accordingly. It is also a good idea to take off your stops
overnight to avoid the wide fluctuations of after-hours trading.
But do keep your target orders in place. I like to break
down my target limit order into smaller bits and set them
one penny apart. Occasionally, one or more of these get
filled overnight in the sort of erratic, widely ranging trading
that characterizes the after-hours market.
4. Keep commissions low. Use a discount broker of
your choice that charges a maximum of $10 per trade.
There are several online brokers (OLBs) that charge as little
as, or even less than, $0.01 per share per trade. You
should not be paying more than this. The qualitative differences between an OLB charging $30 per trade and one
charging $1 per trade are minimal at best. Both will offer
you fast fills, occasional price improvement between the
spread, frills like automatically trailing stops, boxing and
basket orders, and the ability to trade funds, options, and
futures. Why pay a premium for a brand name? Remember,
commissions are part of your overhead costs—and
when running any business, the lower you can keep your
overhead costs, the more profits you get to take to the
bank!
5. Amateurs at the open, pros at the close. What this
familiar trading adage means is that, in general, the well funded
institutional traders often fade (or trade against) the
morning momentum, happily handing shares to anxious
amateurs, before going off to gorge themselves on a high fat
lunch. When they get back to their desks around 2:30
p.m. EST, they fully expect to be able to pick up the same
shares at a better price. They are usually right. That’s why
they are professionals. They get paid to be right about
things like that. So if you must trade in the morning, be
sure to ease into your trades in smaller portions. Yes, you
might miss out on some nice moves, but in the long run
you will save yourself money. Even better: look to enter
your trades within the last two hours of trading. In that
way you are more likely to be in sync with the larger and
more determinative moves caused by professional trading.
6. Know the general market trend, and trade accordingly.
This is more easily said than done, but it is absolutely
essential to successful trend trading. You need to know
each day what kind of market you are currently trading in.Here the general rule can be stated that the type of market we are in will determine the type of trade you put on. There are five general
types of market trends: weak uptrend, strong uptrend,
weak downtrend, strong downtrend, and range-bound. In
weak up trends and downtrends, you should focus on continuation
plays; in strong up trends and downtrends, you
should focus on breakout plays; and in range-bound markets,
you should look for reversal setups.
Street speculator from the turn of the last century, once
said, “Even being right three or four times out of ten
should yield a person a fortune if he has the sense to cut
his losses quickly.” Baruch was right. It is important to keep
losses to a minimum, as most large losses started out as
small ones, and large losses can end your trading permanently.
Normally, we keep our losses small by setting stoplosses
on all open trades. We do this on all trades that we are not monitoring on a minute-by-minute basis; otherwise,
we will keep a mental stop in place and exit the position
once that price level is violated. Remember Warren
Buffett’s Rule #1: “Don’t Lose Money!” Buffett also made
a second rule: “Don’t forget Rule #1!” So take a tip from
the world’s greatest investor and always strive to keep your
losses small.
3. Adjust stops and targets at the end of the day. At the end of each trading day, on a high-watermark basis,
adjust your stop-loss or target price as needed. Here “high
water mark” means you adjust either the stop or target only
if the closing price sets a new high or low from the point
of entry. This is how it works: raise your stop-loss price at
each new closing high since entry (or new low if the trade
is a short). And if you are using a target price as an exit,
lower your target price at each new low if the trade goes
against you (or raise at each new high if short). Don’t get
complacent with your trades. Monitor them each day at
least once near the close, and adjust your stops and targets
accordingly. It is also a good idea to take off your stops
overnight to avoid the wide fluctuations of after-hours trading.
But do keep your target orders in place. I like to break
down my target limit order into smaller bits and set them
one penny apart. Occasionally, one or more of these get
filled overnight in the sort of erratic, widely ranging trading
that characterizes the after-hours market.
4. Keep commissions low. Use a discount broker of
your choice that charges a maximum of $10 per trade.
There are several online brokers (OLBs) that charge as little
as, or even less than, $0.01 per share per trade. You
should not be paying more than this. The qualitative differences between an OLB charging $30 per trade and one
charging $1 per trade are minimal at best. Both will offer
you fast fills, occasional price improvement between the
spread, frills like automatically trailing stops, boxing and
basket orders, and the ability to trade funds, options, and
futures. Why pay a premium for a brand name? Remember,
commissions are part of your overhead costs—and
when running any business, the lower you can keep your
overhead costs, the more profits you get to take to the
bank!
5. Amateurs at the open, pros at the close. What this
familiar trading adage means is that, in general, the well funded
institutional traders often fade (or trade against) the
morning momentum, happily handing shares to anxious
amateurs, before going off to gorge themselves on a high fat
lunch. When they get back to their desks around 2:30
p.m. EST, they fully expect to be able to pick up the same
shares at a better price. They are usually right. That’s why
they are professionals. They get paid to be right about
things like that. So if you must trade in the morning, be
sure to ease into your trades in smaller portions. Yes, you
might miss out on some nice moves, but in the long run
you will save yourself money. Even better: look to enter
your trades within the last two hours of trading. In that
way you are more likely to be in sync with the larger and
more determinative moves caused by professional trading.
6. Know the general market trend, and trade accordingly.
This is more easily said than done, but it is absolutely
essential to successful trend trading. You need to know
each day what kind of market you are currently trading in.Here the general rule can be stated that the type of market we are in will determine the type of trade you put on. There are five general
types of market trends: weak uptrend, strong uptrend,
weak downtrend, strong downtrend, and range-bound. In
weak up trends and downtrends, you should focus on continuation
plays; in strong up trends and downtrends, you
should focus on breakout plays; and in range-bound markets,
you should look for reversal setups.
You should also ask whether
the current trend or
range-bound condition is relatively new or relatively old.
The longer a market persists in its current condition
(uptrend, downtrend, or range-bound), the shorter your
time frame should be for new positions. For example, if we
are in the early weeks of a new bull market, you should feel
comfortable setting a higher target on your long positions.
But if you are long during an overbought market (an older
bull market), you should aim to take quick profits when
given. One quick and easy way to determine the kind of
market we are in is to apply the 50-day moving average of
closing prices to a chart of the S&P 500. Then simply look
at the slope. Is its slope upward (weakly or strongly), downward
(weakly or strongly), or flat (range-bound)? Has it
been this way for a while (prolonged), or did it just turn (new)? And so on.
range-bound condition is relatively new or relatively old.
The longer a market persists in its current condition
(uptrend, downtrend, or range-bound), the shorter your
time frame should be for new positions. For example, if we
are in the early weeks of a new bull market, you should feel
comfortable setting a higher target on your long positions.
But if you are long during an overbought market (an older
bull market), you should aim to take quick profits when
given. One quick and easy way to determine the kind of
market we are in is to apply the 50-day moving average of
closing prices to a chart of the S&P 500. Then simply look
at the slope. Is its slope upward (weakly or strongly), downward
(weakly or strongly), or flat (range-bound)? Has it
been this way for a while (prolonged), or did it just turn (new)? And so on.
7.Write down every trade.We keep track of so many
other things in life—the checks we write, the groceries we
need, the donations to charity we make, our golf scores,
the last time we changed the oil in the car—but how many
of us write down the details of every trade we make? In
reading the Market Wizards books by Jack Schwager (which I highly recommend, by the way), you learn that nearly all
of the wizards keep trading journals. I suggest you do the
same. Make a spreadsheet that records the date of each
trade entry and exit, the symbol of the market traded, the
price of your entry and exit, the size of the trade, the profit
or loss, a running total of profits/losses, and a comment
section where you describe as specifically as possible why
you entered and exited the trade. If you are adept at working
with spreadsheets, you can even program columns to
keep track of your stop-losses, target prices, and position
size.
Analyze these trades at the end of each month. Are
you consistently losing with one particular setup? Are your
breakout plays working better than your reversal plays?
Are your stops set too tight? Use this journal to learn
about your weaknesses as a trader. Awareness of those
weaknesses should soon lead to overcoming them.
other things in life—the checks we write, the groceries we
need, the donations to charity we make, our golf scores,
the last time we changed the oil in the car—but how many
of us write down the details of every trade we make? In
reading the Market Wizards books by Jack Schwager (which I highly recommend, by the way), you learn that nearly all
of the wizards keep trading journals. I suggest you do the
same. Make a spreadsheet that records the date of each
trade entry and exit, the symbol of the market traded, the
price of your entry and exit, the size of the trade, the profit
or loss, a running total of profits/losses, and a comment
section where you describe as specifically as possible why
you entered and exited the trade. If you are adept at working
with spreadsheets, you can even program columns to
keep track of your stop-losses, target prices, and position
size.
Analyze these trades at the end of each month. Are
you consistently losing with one particular setup? Are your
breakout plays working better than your reversal plays?
Are your stops set too tight? Use this journal to learn
about your weaknesses as a trader. Awareness of those
weaknesses should soon lead to overcoming them.
8. Never average down on a losing
position. Let’s say
you buy a stock, expecting it to take off like a rocket, and
instead it drops like a rock. What do you do? Answer: you
do nothing. You stick with your plan. You keep your stop loss
in place, lower your target at the end of the day, and
wait patiently. Do not buy more shares at a lower price to
make your average cost lower. That is a loser’s game. You
already own shares at that price; why buy more? Why
throw good money after bad? Just sit on your hands and let
the market do what it wants. Now the one exception to this
rule is when you are positioning yourself into a trade and on your entry day you take advantage of a small dip in share price. But in this case you must still be favorable toward
the chart, far away from your stop price, and price is showing
signs of recovering from its slight dip.
you buy a stock, expecting it to take off like a rocket, and
instead it drops like a rock. What do you do? Answer: you
do nothing. You stick with your plan. You keep your stop loss
in place, lower your target at the end of the day, and
wait patiently. Do not buy more shares at a lower price to
make your average cost lower. That is a loser’s game. You
already own shares at that price; why buy more? Why
throw good money after bad? Just sit on your hands and let
the market do what it wants. Now the one exception to this
rule is when you are positioning yourself into a trade and on your entry day you take advantage of a small dip in share price. But in this case you must still be favorable toward
the chart, far away from your stop price, and price is showing
signs of recovering from its slight dip.
9. Never over trade. You know the feeling: you’ve
closed out all your overnight trades for a tidy profit and you
say to yourself, hey, I’m on a winning streak, let’s take
advantage of it. So you put on a few more trades. But these
don’t go well, and now you are back to breakeven. You want
those morning profits back, so you put on a few more
trades, only now you go with the e-minis or a few, deep inthe-
money options to leverage your position. These don’t
go well either, and you close the day with a loss. Or perhaps
you start the day by closing out losing positions, and
you overtrade to try to get the money back, only to deepen
your losses on the day. This is the obsessive-compulsive
disorder known as overtrading. It is a problem familiar to
all traders and is rooted in deep-seated feelings of fear and
greed.
The best way to overcome this behavior is to set limits
on yourself: when you reach a certain profit point during
the day, either reduce your position size or just quit.
Better yet, when you reach a certain number of trades during
the day, just quit. Reward yourself then for your disciplined
behavior: go sit by the pool, read a good book, take
a bike ride in the woods—just do something nice to reinforce
this discipline until it becomes a habit.
closed out all your overnight trades for a tidy profit and you
say to yourself, hey, I’m on a winning streak, let’s take
advantage of it. So you put on a few more trades. But these
don’t go well, and now you are back to breakeven. You want
those morning profits back, so you put on a few more
trades, only now you go with the e-minis or a few, deep inthe-
money options to leverage your position. These don’t
go well either, and you close the day with a loss. Or perhaps
you start the day by closing out losing positions, and
you overtrade to try to get the money back, only to deepen
your losses on the day. This is the obsessive-compulsive
disorder known as overtrading. It is a problem familiar to
all traders and is rooted in deep-seated feelings of fear and
greed.
The best way to overcome this behavior is to set limits
on yourself: when you reach a certain profit point during
the day, either reduce your position size or just quit.
Better yet, when you reach a certain number of trades during
the day, just quit. Reward yourself then for your disciplined
behavior: go sit by the pool, read a good book, take
a bike ride in the woods—just do something nice to reinforce
this discipline until it becomes a habit.
10. Give at least 10 percent of all trading earnings
to
charity. The children of John D. Rockefeller were taught
five basic rules regarding money: (a) work for all you get,
(b) give away the first 10 percent, (c) invest the next 10 percent, (d) live on the rest, (e) and account for every penny.
The Rockefellers believed that giving away their money
was essential to their wealth. And so should you. The secret
is that money multiplies fastest when it’s divided. It’s all
God’s money, in any case. We are merely temporary stewards
of a small portion of God’s abundance. And when this
portion is shared freely with those less fortunate, we prime
the economic pump of the universe.
I encourage you to establish a legacy that will outlive
you. Plant money trees from which others will harvest the
fruit. Ultimately, the only purpose for having wealth is to
help others less fortunate. Wealth shared is true wealth
indeed. The way I see it, God in His grace gave me the
undeserved talent to make money by simply sitting in front
of a computer and clicking a mouse every now and then.
As a result of that gift, we as a family have been able to
travel the world, build a large home, and enjoy some of the
finer things in life. The least I can do is give a healthy portion
of the fruits of that gift back to God’s work in the world.
charity. The children of John D. Rockefeller were taught
five basic rules regarding money: (a) work for all you get,
(b) give away the first 10 percent, (c) invest the next 10 percent, (d) live on the rest, (e) and account for every penny.
The Rockefellers believed that giving away their money
was essential to their wealth. And so should you. The secret
is that money multiplies fastest when it’s divided. It’s all
God’s money, in any case. We are merely temporary stewards
of a small portion of God’s abundance. And when this
portion is shared freely with those less fortunate, we prime
the economic pump of the universe.
I encourage you to establish a legacy that will outlive
you. Plant money trees from which others will harvest the
fruit. Ultimately, the only purpose for having wealth is to
help others less fortunate. Wealth shared is true wealth
indeed. The way I see it, God in His grace gave me the
undeserved talent to make money by simply sitting in front
of a computer and clicking a mouse every now and then.
As a result of that gift, we as a family have been able to
travel the world, build a large home, and enjoy some of the
finer things in life. The least I can do is give a healthy portion
of the fruits of that gift back to God’s work in the world.
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