Unfortunately, the majority of us who trade often wind up failing. In fact, the numbers are staggering. We often hear the quoted statistic that 90% of investors fail. The question then is, what is it about the 10% of us that makes us successful?
We may be quick to assume that what makes a trader successful is knowledge, an innate ability to make the right decisions, an expensive education, a significant amount of resources, and lots of experience.
All of the great traders I know are successful for very different reasons. They are flexible, disciplined, determined, adaptable, driven, and have a winning mindset.
Approaching trading with a winning mindset positions us for success. No amount of education or resources will do us an ounce of good without the right attitude. A winning mindset makes it possible for anyone to succeed.
So, what is a winning combination of traits that most profitable investors have?
Understand that there is always room for improvement
We should never allow ourselves to become complacent. There is always something to learn, always something we can improve upon, and there is always a more efficient way to do things. We should be responding and adapting to the current financial climate and constantly analysing our trading. Keeping a trading diary will be an invaluable tool to review our trading.
In order to improve, we need to educate ourselves. It doesn’t have to cost a lot of money or any money at all. The internet is bursting at the seams with information about trading. Websites, trading blogs and YouTube videos cost nothing, but are invaluable. We can set a goal for ourselves like reading at least one book on trading every few months. If we are able to spend some money, hiring a trading coach, and attending some educational seminars are good options too.
So, in a nutshell, improvement includes the following elements:
- Tracking all of our results in a trading journal
- Using a spreadsheet to record our trading performance and reviewing it monthly
- Regularly reviewing our trading plan
- Aim to spend 20% of our trading time on education and improvement
Create a trading plan that is easy and in line with your personality type
Part of being a successful long-term trader is having a simple plan that is easy to stick to. Keeping it simple makes it more likely that we will follow it. It also makes it easier to change and adapt to the fluctuating markets.
Also, we want to make sure that our trading plan aligns with our personality. So, for example, for those of us that are more creative thinkers, we might want to go with a discretionary plan. On the other hand, if we are more analytical, a mechanical trading plan may be the way to go.
The reason we fail is very often a result of us deciding to give up. What are the odds of someone winning a marathon if they stop at mile number 25? Of course, zero. Well, it’s no different with investing or anything else for that matter. When we give up, we have no chance to succeed.
Winning at trading requires commitment. As committed traders, even when we go for stretches where we are taking losses, we stick with it because we know that in the long-term, it is likely that we will recover.
I am not going to say that any of this is easy. To be a successful trader, we need a great deal of willpower, resilience, dedication and determination. Always remember though, the only way to become profitable is to stick with it through all of the ups and downs.
When we trade for ourselves, we don’t have anyone looking over our shoulder holding us accountable for what we do. I don’t know many people who are very good at holding themselves accountable. When nobody is looking, it becomes very tempting to start pushing our risk limits above what we originally planned. I experienced it myself. When I was trading on my own, there were many times I considered straying from my plan. After all, if it didn’t go well, who would know?
Luckily, I now have an employer, my colleagues and my many clients are making sure that I remain accountable for my actions. When we are accountable, we are less likely to take unnecessary risks, become complacent, or engage in unprofessional trading practices.
If we find ourselves having difficulty holding ourselves accountable, we can find someone to report to on a monthly basis. It could be a friend, family member or a trading coach. We should report not only performance metrics, but also demonstrate how disciplined we have been in staying with our plan.
Excelling at risk management
To be a successful trader, we should not be aggressively focusing on making money, we should instead focus on holding on to what we have. The market is not forgiving and it does not reward those of us who become complacent or take risks unnecessarily.
We always want to use stop losses and never risk anything higher than 2% of our capital per trade. We should minimise draw down events whenever we can and always be knowledgeable about the overall risk to our portfolio.
So, to summarise here are some key take away points on risk management:
- Always understand how much capital is at risk
- Past performance is not a good predictor of future performance
- If a position size doesn’t feel comfortable, don’t take it on
- Widen stops when in doubt
- No more than 2% of our capital should be risked on a single trade
Creating a winning mindset
As I said earlier, without a winning mindset, our chances of success are minimal. We should ask ourselves why we are trading. If our response doesn’t include creating wealth, failure is likely to be in our future. Trading is all about accumulating wealth over the long-term. If we have a winning mindset, we see trading as a method of improving our lifestyle and creating a sound financial future. We don’t view it as gambling or something we like to do as a hobby.
To be successful, we must believe in ourselves and our abilities. The best way to gain that confidence is through practice. Those of us embracing a winning mindset are not afraid of failure. We know that the market may be volatile in the short-term, but we also know that in the long-run, our trading plan will lead us towards our financial goal. It never helps to stress out about long-term performance, we simply need to trust in our plan.
What are some ways we can create a winning mindset?
- Learn from successes and from failures
- Plan, plan, plan
- Have goals that are simple and achievable (i.e., reach a 20% return with only a drawdown of 5% annually)
- Learn to work well despite pressure
- Always seek out the truth
- Keep your ego in check
How profitable we become depends upon our ability to stick with our plan, no matter how rough things seem at times. It depends upon our ability to commit and not give up. By cultivating these six characteristics within ourselves, we will secure a financially sound future.