Hollywood loves a good story. A good story sells tickets. Who wants to see a movie where a well-researched, level-headed day trader makes modest gains with a disciplined investment strategy? In reality, though, renegade trading is more likely to lose money than pay for your next Lamborghini.
So what makes a successful trader? Beyond the setups and strategies, what habits make money when trading stocks? The answer: a little common sense and a cool head. In the following article, we’ll outline seven habits of highly successful traders.
1. Good traders don't gamble.
The old characterization of Wall Street as a casino has negative implications. Treating Wall Street like the Bellagio encourages risky behavior. But more importantly, taking out a second mortgage chasing a hunch is a recipe for disaster. Good traders understand that and keep their wealth in perspective.
Whenever you trade, have a firm grasp of what you can comfortably afford to lose. Avoid emotional investment or so-called "need-based investment" that might lead to gambling with irreplaceable money in a short-term attempt to make a profit. Trading is a long-term game and sacrificing your short-term financial health for a quick buck is a dangerous road to travel.
2. Good traders accept risk.
On its most fundamental level, stock trading is a risk. When there is no guarantee of gain involved, that is, by definition, risk. Therein lies the primary reason for rule 1. Good traders understand and accept a certain amount of risk when cutting deals.
Understanding risk can also provide a cool head in tumultuous times. It can be easy to see a loss of any kind as an abject failure, however a calm demeanor and understanding that losses can and do happen may prevent knee-jerk moves. Knowing the risks with each purchase, and even with the activity of trading itself, will inspire more confidence than fear in the long-haul.
3. Good traders manage trades.
Trading is not cured, it is managed. This, more than anything, is the reason for understanding risk. As a trader, your job is to know the risk involved with trades and mitigate damages should that risk lead to loss.
Again, keeping a cool head is important. Avoid the gambler's mentality that "it will rebound, I just know it." If your experience has shown that a temporary loss is just that, temporary, then stay the course. But know when to cut your losses with a disciplined strategy and level head.
4. Good traders do their research.
Without knowing what to expect from a trade, the market can seem like an unpredictable place. But knowing the background information about your investments and keeping an eye on news events and market fluctuations can provide more confidence than simple instinct can.
Keep a journal of trades and analyze what went right, what went wrong, and adjust your strategy accordingly. Rely on analytics and patterns and use this knowledge to guide the ship through uncertain times. Doing so will not only yield more profit, but provide peace of mind in the process.
5. Good traders keep a level head.
While temperance has already been common theme throughout these habits, it bears repeating that successful traders are disciplined and dispassionate. The fiery personalities of Wall Street gamblers may net them a quick one day gain, but the result of a career based on impulsiveness is inherently fruitless. Emotional moderation is the name of the game on stormy seas.
Emotional moderation applies to both gains and losses. Losing money on the stock market can be tough to swallow, but knowing when to hold 'em and when to fold 'em without letting fear or worry play a part is important. In addition, avoid getting too high on big gains. You made a great choice, congratulations! But cockiness leads to a lack of discipline, which no one can afford if they hope to make a career out of trading.
6. Good traders are disciplined.
This may sound like rehashing habit 5, but specifically this habit refers to investment strategies. What's worked for decades will likely work for decades. Chasing quick gets and quirky strategies is more likely to yield unpredictability than long-term success so focus on what works.
In addition, avoid over-thinking your strategy. Knowing what strategies work means honing in on one or two principles that profit and applying them judiciously. This may take the thrill out of trading, but, again, you're not gambling, you're investing.
7. Good traders accept responsibility.
At the end of the day, your trades are yours to bear. Anger at a poor set of stock tips or blue-chip turned sour ignores the fact that you made the trade and the positive and negative consequences are ultimately your responsibility to shoulder. By accepting this, you can keep your head on your shoulders when something good comes through and profit as a result.
And ultimately, that's really the most common characteristic of good stock traders: accountability. You are accountable to your strategy, your trades, your emotional well-being, and your bottom line. Taking control of your destiny with a cool head, a rational mind, and a disciplined and well-researched strategy may not be very "Hollywood", but you'll remember that even Gekko's unpredictability caught up with him. And if Hollywood says it's a bad idea, you know it's a bad idea.
What other habits of highly successful traders can you think of? Leave a comment for us below.