Trading Academy

Top 10 Secrets of the Pros -- The Keys to Trading Success

by Nick Katiforis

1. Expect the Unexpected

In the world of financial and commodity trading, there are many times when unexpected events can and do occur. Change is the lifeblood of the markets. This is what makes trading such a challenging endeavour. To be successful you must have a mindset that is open to anything. Mentally rehearse situations that don’t appear likely. Use your imagination to think through situations where markets could make extreme moves and how you would cope with those situations.

Don’t become complacent with a market. Don’t be too logical with the market. Realise that markets can make extreme price moves based on emotion. Trying to resist such moves has been the undoing of many traders.

2. Be a Contrarian

Being a contrarian means thinking differently to the majority of other traders. It means having the conviction and guts to follow your own path despite what the majority would tell you. Most good traders are contrarian in nature. They see things that others don’t, and can imagine situations that others can’t. They are independent minded people that are not easily swayed by opinion. When an unexpected move occurs in a market you can be sure that plenty of reasons for the move will come out after the fact.

Finding reasons before the move however is a different matter. In such a situation you will be going against the accepted wisdom of the market. Although the scariest, these types of trades can sometimes prove to be the most profitable.

3. Trading with a Plan

Planning is one thing that can increase the odds of success for everyone who trades, yet only a small proportion of traders plan their trades. Planning allows you to put structure where there otherwise is none. It allows you to make sense of the almost limitless amounts of often-conflicting information that you as a trader will be bombarded with. Indecision caused by confusion can be lethal in the market. Having a plan helps to alleviate this problem.

Plan what you want from the trade and how you will get it. Then plan what you will do if you are wrong in your judgement. Only by doing this will you be able to apply consistency to your trading efforts, which is what all-professional traders aim for.

4. Learn Patience

Traders that are lured to the markets with the intention of making a quick buck are often disappointed. They equate trading to a spin of the wheel at roulette. They have placed their bets and they want action right now! Successful trading requires patience in two ways. Firstly to wait for the right opportunity to arise, gathering as many factors in your favour as possible before you place the trade. Secondly to give the trade sufficient time to work.

Too often you hear stories of traders who gave up on a trade after a period of time, only to see the move happen after they have exited the position. The markets have a way of doing things in their own time that doesn’t always coincide with the wishes of the trader. Be patient and you stand a much better chance of being a consistent winner.

5. Minimise Emotions

The difference between paper trading and trading with real money is immense. Why? Because when we trade with real money we have something on the line, and the movements in the market cause us to feel something in our gut. The feeling is raw emotion. These feelings can cause us to do things that we would otherwise not do, to sabotage our success. Our emotions are what really drive us as human beings much more than our intellect. We make most of our decisions based on our emotions whether we like to admit it or not.

Emotional decision-making can be beneficial in some areas of our lives but definitely not in trading. Trading is a business. Therefore you need to approach decision making the same way you would in business. A trading plan helps to minimise emotions as you have some structure in which to base your decisions on. Minimise emotions as much as possible as the feelings of euphoria and despair do nothing to make you a better trader.

6. Trade in Moderation

Strive for consistent returns on your account and not for the big windfall. They will come by themselves. It is better to trade small positions in a number of unrelated markets, than too big a position on the one market. Wait for accumulated profits before increasing the size of your trades. Being greedy is not a good characteristic to have when trading. It puts your account at too great a risk.

To be around for the times when phenomenal profits occur you need to stay in the arena. Putting too much of your account at risk on any one trade is the surest way of jeopardising your prospects of being around for the good times. Trading in moderation allows you to build your positions up over time when you have accumulated profits, with much less risk and without the huge emotional swings.

7. Never let a Good Profit turn into a Loss

Allowing a trade that has built up a decent profit to then turn into a significant loss can be demoralising to a trader. Worse than that, it is also poor risk management. As an example, options are great to use to hedge the risk on a trade that is profitable. For option buyers with significantly profitable positions, turning bought options into free trades by selling out of the money options to get back the original premium paid or by closing half the position when options double in value should be mandatory. By doing so you are still giving yourself the potential for further profits if the market keeps going in your favour, but means that you eliminate your original risk.

For option writers this means taking profits when the majority of premium has been collected, and not waiting until expiry. Small points like this can make a massive difference to your trading account.

8. Never Average a Loss

Of all the blunders in trading this one is one that you should memorise. Averaging a loss basically means to add to a losing trade in the hope of winning your money back, if the market turns around and goes back in your favour. It is basically a hope trade but is a very dangerous one. It can cause a small manageable loss to turn in to an account threatening loss if taken to extremes.

When you lose, lose gracefully. There are plenty more opportunities to make money. Don’t make the mistake of making the trade a personal vendetta. See what you did right, see what you did wrong, then forget about the trade and move on to the next opportunity. Do not throw good money into a losing trade.

9. Diversify

Trade as many markets as you think you can comfortably handle. Diversifying your trades amongst different markets helps to increase your chances of success. It allows you to participate in a number of unrelated markets simultaneously, thus widening your prospects of finding a profitable market. It’s like putting a number of hooks on a fishing line to see what’s biting.

Trade different market sectors that are not related. If bullish one market, be bearish another. Diversify the types of strategies you apply. In short, look for consistent, steady returns from a number of different markets.

10. Cut your losses

The most important of all of the trading maxims is to cut your losses. This is the number one cause of failure in trading. It always has been and probably always will be. Allowing manageable losses to turn into large losses that can affect your ability to keep trading is what you want to avoid at all cost. Don’t make exceptions. Always close a trade when losses go beyond your pre determined risk point every single time.

As well as the financial damage not cutting your losses can cause, it also absorbs all your energies and hinders you from finding new trading opportunities. When you learn it, there is nothing like the feeling of relief when closing a trade before it has a chance to do your account significant damage.

When I was a Floor Trader trading my own account at the Sydney Futures Exchange, the running joke after getting out of a bad trade that you would often hear, would be traders describing the experience as “getting out of the sauna”. Learn to do this and you have the chance of joining the winner’s circle.