There is an old saying in business: “Fail to plan and you plan to fail.” It may sound glib, but those who are serious about being successful, including
traders, should follow these eight words as if they were written in stone. Ask any trader who makes money on a consistent basis and they will tell you,
“You have two choices: you can either methodically follow a written plan, or fail.”
If you have a written trading or investment plan, congratulations! You are in the minority. While it is still no absolute guarantee of success, you have
eliminated one major roadblock. If your plan uses flawed techniques or lacks preparation, your success won’t come immediately, but at least you are
in a position to chart and modify your course. By documenting the process, you learn what works and how to avoid repeating costly mistakes.
1) Take Complete Responsibility:
For the successful trader knows every action he takes,
every decision he makes he, and only he, is responsible for that action.
You see, when you accept 100%, no questions asked responsibility
for all your actions you close the door to “excuses” behind you. When
something goes wrong instead of looking for someone else to shoulder the
blame, you will accept responsibility, note it down and vow never to
repeat it again. Simply, you are willing to accept you are going
to make mistakes, but more importantly, you are going to learn and never
repeat those mistakes. A vital component of any winning trader.
Could you imagine Warren Buffet losing a few million $$$’s on a
share trade and then blaming the general conditions of the market.
Or blaming his broker for giving him dud advice? no way! Just not
going to happen. I will guarantee when top traders takes a loss the
first thing they will ask them-selves is “Did I follow my rules?”
If the answer is yes, then they will look at their rules. Is there
something that could be changed in their rules to avoid this loss again?
Many times the answer will be a re-sounding no.
On the other hand, if after asking the question “did I follow
my rules?”, If the answer is NO. Then some deep self explanation will
be called for. Why did I fail to follow my rules? How can I stop
my-self from doing that gain? Am I likely to do that gain, etc..
But do you notice the wording of the questions? How can I,
Will I, Why did I. IIIIIII Here the trader knows he takes total
responsibility for every trade and is seeking re-assurance that
he will not break the rules again.
There’s an old saying in trading:
” If you have to ask you shouldn’t be trading”
Think about it. If you have a system that you have tested
and proven over the long run that it does outperform the market
and it is a system that fits you, why will you EVER have to
ask for an opinion? What extra will a third party opinion provide?
Apart from confusing you and clouding your opinion?
If you are a long term trend follower then why ask a day trader?
If you are a value investor then asking a momentum trader will be a
total waste of time. What I am saying is, no two people have the same
opinion. Why would you believe some-one else over your trading rules?
It’s a fact of life, and even more so in trading, most people want
to be told what to do rather than acting on their own. Yet this is a major
reason most people fail in the markets. Either accept total
responsibility for your trading action or do not trade at all.
If your number one rule is
“to follow your rules” why will you need to ask a guru what
they think of your position? If you EVER find your-self wanting
to ask a third party about your position do this:
* Close the position out.
* Review your plan and rules.
* Work out why you lack the responsibility to follow that plan
* When you are convinced you don’t need a third party opinion
start trading again.
How can a trader learn to accept total responsibility?
Have a set of rules and realize THE most important point in
trading is following those rules. Once you have a set of
firmly established rules you will find your-self not having
to follow out-side opinion. In fact I go to great lengths
not to listen to outside opinion. Simply because, I know
by following my rules I will be on the right side of the
market 95% of the time and I will never miss a big move.
Those kind of figures are much better than any out-side
source can give you.
So from today, learn to take total responsibility
for all your trading decisions. Strive to develop and
then religiously follow a set of trading rules, knowing
it is the importance of following those rules that
ultimately determines whether you will win or lose in
the long run.
If you ever find your-self thinking, “they did this”or, “the market caused
that loss.” Change it to: “Did I follow my rules?” If the answer is yes pat
your-self on the back as you are on your way to becoming a market
winner (one of the minority). If the answer is NO find out why and strive
never to repeat this error again.
Accept total and utter responsibility for every
trade you take from today and you’ll be amazed at
how easy trading really is.
2) Have a System That fits You:
Every successful trader, investor,money manager,etc.. has a system
that fits them. Some are long term, some mechanical, some intuitive,
day traders, scalpers, arbitrage, value, momentum.The system its self is
not the important factor. What is? Is that the system fits their unique personality.
The system does not matter. I’ve heard of value investors (Warren
Buffet) who make untold millions from the stock market. I’ve heard
of day traders taking home over $2 million per annum in profits.
I’ve heard of a dancer making $2,5 million from Momentum trading.
What do they have in common? As you can see it’s not the system but
they operate a style of trading that they are both happy with and
excel at. They wouldn’t dream of trading any other way. No-one told
them to trade this way it just happened this way.
Too many traders try to copy the latest hot fad in trading. Right
now that would be day trading. But that style of trading will not suite
every-one. To be a successful day trader you have to love the short term
up and downs of the market during the day. Being in contact with quotes
for hours at a time. Yes, there are a number of traders making very good
incomes from day trading, but there’s many more who lose their shirts
within a couple of months and don’t even find out whether day trading
is suited to their temperament.
For some traders buying a stock and holding on to it for a year as
it doubles in price would be torture. Although long term investing can
offer fantastic rewards with very little work unless you have the
patience and discipline to ride your profits all the way to the top
then you’ll never succeed with this method.
It’s a little like choosing a career. I remember reading a book some
time ago about the world’s best managers. And one characteristic the author
emphasized with all these top achievers was their LOVE for their chosen
careers. Most of them said they couldn’t believe they were getting paid
to do something they loved so much. It’s no different in trading.
You will only be a top trader if you trade a system which you simply
love to trade. You wouldn’t swap that way of trading for anything. And
the profits you make, well that’s just icing on the cake.
How do you find a system you are happy with? You have to work backwards.
First work out your objectives!
Ask these questions:
* What annual rate of return do I want?
* Do I want to trade full time, part time, hardly any time?
* Can I handle the stress of day trading and short term trading?
* Do I have the patience for long term trading?
* What kind of personality am I? Do I need lots of action, Do I need
to make decisions all the time?
* What trading books have i read and which top traders do I most admire
and why? Could you easily copy their style of trading?
What-ever you do don’t read about a hot shot day trader and then try to emulate
him if day trading is not for you. Strive to find a way of trading you will
be comfortable with and aim to become the world’s best at this style of trading.
For me I like the thought of buying a share at $30 and selling it
9 months later for $130. Sure it doesn’t happen all the time. But it
only takes one or two of these moves per year to make it a fantastic return.
I am very patient. Not only whilst in a trade but I see absolutely
nothing wrong with sitting on the side-lines for months. If the
conditions aren’t right for me than I will not trade. I love the idea
of spending just a few minutes per day checking the charts and the rest
of the time is mine to study and write, etc.. For me the big money is
in the big moves, not the individual fluctuations.
This style of trading will not suite every-one, but the point is
after many years of trial and error I have found a system that fits me
and I aim to become THE world’s best trader with this system.
You must do the same. If you are trading a system that does not fit
your personality you can never gain the confidence nor the results to
truly make the big profits. If you are a new trader or an unsuccessful
one then I suggest you start by asking your-self
“What kind of trading suites my personality?” Spend lots of time getting
this correct as this is you foundation. Build a strong foundation and
your trading system will be strong and stand the test of time.
Build a weak foundation and your trading system will crumble along
with your money.
This is where the majority of traders go wrong. They have no idea which
style of trading suites them. They keep buying into the latest software,
or listening to the new guru, hoping this will change their trading results.
Most never get to know what successful trading is all about as the average
trader lasts SIX months. I believe any trader who can last over TWO years
in the market will probably go on to become one of those rare breeds:
A Stock Market Winner. Why? Because after two years they start to develop
a set of rules that fits them. They start trading a way they are comfortable
with. Unfortunately, in their haste to make a ton of money, most traders
will never get two years experience before they lose their money and/or
Say it today.
” I will find a system that fits me and I will become THE world’s best
trader at this ONE style of trading”
Go and get to work. There’s a lot of soul searching to be done.
3) Plan a Trade and Trade a Plan:
Without doubt, no trader will last long if he doesn’t plan every trade.
But there is absolutely no point in making a plan for a trade if you are not
disciplined enough to follow it.
A plan should cater for every eventuality. As Richard Dennis (Turtles fame)
said,”Don’t worry about where the prices are going. Worry about what
you are going to do when they get there.”
Think about what is being said here. Once you put your money down on a
trade you can not control the prices. So stop worrying about what could
happen and concentrate on you trigger points and what you will do when
these points are violated. By doing this your trading stops being emotional
and now becomes very systematic and stress free.
Look at this example:
1) you like the look of stock XYZ Corp. currently trading at $40 and you
place a buy 100, stop in at $42. This is just the beginning. You must then
ask and answer the following questions:
* IF filled on this trade where will where will I place my initial stop
loss. i.e “How much of my capital am I willing to lose?”
* IF filled on this trade how will I take profits? By how much will I
trail my stop? What exit strategies will I use?
* IF filled, will i add more shares as the trade goes my way?
* If filled and the share does not show a profit after X weeks, will
I get out, or will I let my trailing stop exit me from the trade.
* IF stopped out of this trade will i be willing to try and get back in,
or completely scratch the trade and look else-where?
2) So having made a complete plan, prior to entering the trade you place
the order to buy 100 XYZ corp at: $42.
3) You are filled at $42 1/4, automatically you place a stop order in at
$39. No guessing it’s done automatically.
4) The trade goes your way and a second buy order is placed in at $50.
5) You buy 100 more at $50 and the stop is now moved up to $45.
6) The trade goes your way and you keep raising your stop at a safe
7) Your sell stop is hit at $130 and you exit the trade with a massive
Do you see now that by having a plan everything becomes automatic.
You know where to get in, place stops, add and exit. In short you are
now trading professionally and not from emotion.
Not once did you have to ask for opinion. Not once were you afraid
of letting a profit get away, or of a loss becoming too big.
Simply put, if you make a plan and have the discipline to follow it
trading becomes very simple and stress free.
In my many years of trading one point I try to get across to other
would be traders is the market will always do its utmost to throw
you off track. Once in a share it’s a little like riding a wild horse.
The prices will thrash around violently shaking off all scared and
emotional traders. It will only be the ones who have the discipline
to follow a set plan that will benefit from the full move.
If you ever find your-self having to ask some-one for an opinion
on a stock you hold then it can only be because you either have not
made a plan, or you are second guessing the plan, in which case you may
as well not bother making one in the first place.
Planning a trade should be no different from planning a journey.
You must plan for all kinds of events. Especially the unforeseen ones.
Most of the time a trade will go your way and the plan will barely
have to be looked at but what if the share gaps down? flys up? goes
sideways for six weeks, the market crashes, the company announces a
complete surprise announcement which makes the share gain $30 in
one day? If you aren’t prepared for these surprises then when
one does happen you are going to find yourself wandering what to do.
And once your are trading from the “hip” and not from a plan then
expect your results to worsen.
Having a plan totally removes all opinion and emotion from a
trade and anything which does this can only be good news.
Time and time again at seminars and meetings I hear the same
” I bought ABC stock at $25 a few months ago, do you think I
should still keep it?”
When I hear such questions I (discreetly) shake my head. How
can any-one trade such a way? Where is his plan? When he got into
the trade where was he get out point? Basically what the hell is
this guy doing trading? Does he really expect to out-perform the
market when he has to ask a third party about his stock holdings?
If this guy had a plan and more importantly the discipline to
follow he would never ask such a question.
This is probably the single biggest reason people love to
follow opinion. People just love to be told to do something
rather than thinking of it for them-selves. Reading a recent
Internet magazine I was astounded by the number of followers
some of the tip sheets have. The top ones have from 15,000
to 80,000. Are any of these followers really making them-selves
better traders? I have no doubt a small percentage are but the
majority aren’t. Why? Because by following some-one else they
abondon the principles laid down in this book. There is no
system. Responsibility has no been shfted to the guru (so there’s
the excuse for the losses in place) Worse of all they do not
have a solid plan.
When you start following your own plans you will find your-
self not wanting to listen to out-side opinion. If you hold ADF
stock and bought at $60 and your initial stop loss is at $56 then
why would you care if the local guru is saying, “Sell ADF it’s
over-valued and will fall to $20.” For one, he is just as likely
to be wrong as right and secondly if your stop is at $56 then let
this kick you out of the trade. At least that way when you ask
your-self “did I follow my rules today?” the answer will be YES.
I can guarantee before Warren Buffet, or George Soros buys
$50,000,000 worth of stocks they know exactly what they will do
if prices swing one way or another. Could you imagine Warren Buffet
thinking, ” gee, I bought $20,000,000 worth of DFG stock and it’s
down by 15%. what shall I do?” No way! And why should it be any
different for your trading? The point is it doesn’t matter whether
you are trading with a $5,000 account or a $50,000,000 the
principles are the same. You must eliminate all emotion and follow
To be a winner in the markets you can never trade from emotion.
and the only way to eliminate emotion is to have the iron
discipline to follow your own plan. It’s said most traders never
plan a trade never mind have the discipline to follow one.
If you want to become one of the few market winners you must
“Plan every trade and trade every plan”.
Stay tune for part 2.