What Makes a Great Trader?
What makes a great trader? It's a question that's been asked of me a few times over the years and since it's a bit of a slow month and I've never answered it in a newsletter before, let's dive into my thoughts this month. Note too, most (if not all) of these traits can be applied to the word "investor," too.
Here goes:
Risk Management: First and foremost, great traders MANAGE RISK. The saying "There are old traders, and there are bold traders, but there are no old, bold traders," comes to mind. Great traders use stops and know when to accept a loss. One of my favorite things to point out is that some of the best traders in the world lose money on 90% of their trades. That's right, they are consistently WRONG in their investment decisions! However, their losing trades are limited to 2-5% losses while their winning trades result in profits of tens to hundreds of percent. This is why one of my pet peeves is the misuse of the phrase, "No one can consistently time the market." Whether you can consistently time the market is completely irrelevant! What matters is how little you lose when you're wrong and how much you make when you're right.
Emotional Control: Great traders accept they will make hundreds, even thousands of losing trades over the course of their lifetime - it's part of the job description. Great traders are able to maintain a steady nerve and not get sucked into "revenge trading" after a losing trade. Furthermore, great traders also know they will "miss out" on many winning trades that they didn't enter. Again, they do not dwell on the missed opportunities but instead adopt the simple mantra, "Next."
Discipline: A disciplined trader is at his or her desk before the market opens and after it closes. They're there on the weekends and (some) holidays. Trading is a "job" to them, not something they do for fun, in their spare time, or to brag about to their friends when they "hit" the occasional big winner. This discipline means their trading is methodical, tedious, even boring.
Ownership: Great traders own their trades, all of them. They admit they are the ones that pushed the "buy" and "sell" buttons and don't blame company announcements, analyst notes, "dark pools," or anything else for their profit (or loss) at the end of the year. Sure, all of those things will happen - some helpful, others not. The point is that, in sum, a great trader takes responsibility for themself and doesn't point their finger at anything or anyone else as being responsible for their success or failure.
Adaptability: Different markets present different conditions. Sometimes the market trends up, other times down, and sometimes it can go sideways for long stretches of time. A good trader needs to be able to identify the type of market that is present and adjust their strategy accordingly.
Openness: An offshoot of adaptability, openness means a willingness to accept a wide variety of potential outcomes. Too many times I see clients come into my office certain that one outcome or another is "going to happen." There's not a shred of doubt in their assertion. A great trader is filled with doubt, constantly.
Patience: Perhaps the most famous trader of all, Jesse Livermore, once said, "The big money is not in the buying and the selling, but in the sitting." Livermore would sometimes go weeks or even months without placing a single trade, instead just "sitting on his hands" waiting for the right opportunity. Too many new traders wake up each morning anxious to make their next big trade. Great traders wake up in the morning concerned about how to lose the smallest amount possible on their next trade and happy to go to bed that night without placing a single order.
Notice what's not on my list? Things like high level tax knowledge, insider information, a TV with CNBC streaming, or a gigantic computer with multiple screens running on expensive software. None of those are necessary to creating a great trader. Want to discuss more? Send me an email and let's talk about it!
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