Trading is hard work. Becoming a profitable trader is even harder. So how can traders move from average to successful? I’ve found the best way to help those completely new to trading is to explain the amount of time and dedication required to become a profitable trader with sports analogies. For instance, in baseball if it’s the first time you experience a 100mph fast ball, you’re going to swing and miss. But if you’re dedicated, work hard and practice, you’ll be able to anticipate the 100mph pitch and knock it out of the park. The most successful athletes work hard and constantly seek out ways to improve their performance, and those same principles apply to successful traders.
As a trader with more than 10 years of experience on the floor and as a trading scout, I’ve seen traders at various stages of development. There are certain characteristics that all of the best traders have in common:
- Aptitude for trading
- Net daily profit consistently outweighs loss
- Average wins versus duration consistently longer than average loss duration
- Proper risk management
- Trader instincts
Aptitude for Trading- Some people are born with this innate component. Others can obtain it through dedication and patience. The best traders realize they can never stop learning and they should always be open to new ideas because a trading strategy won’t work forever. Successful traders constantly evaluate their performance to remain at the top of their game.
One way to evaluate trading performance is to document each day in a journal. Recording both emotions and trades allows traders to reflect on their behavior in relation to the market activity, which usually results in key takeaways and eventually an increased aptitude for trading.
Net daily profit and loss- Those who are completely new to the world of futures trading will benefit from a service provider that teaches them the fundamentals of trading without requiring them to risk their own capital. Service providers simulate the trading experience with real-time markets. Because the simulated experience is virtually identical to what the account would look like for a live trader, the trainees are able to truly learn while overcoming common hurdles and obstacles all traders encounter when trading a live market, helping to develop them into a successful trader.
Ultimately, smart traders learn from their past trades to maximize their net daily profits and minimize their daily losses. Not every day will be a winning day, but the key is to quickly rebound so the losing day doesn’t become a habit.
Average win versus average loss duration- Profitable traders should hold on to winning trades longer than losing trades, which seems fairly straightforward, but it’s not always that easy. One of the biggest challenges traders face is the emotional attachment to trades and their position in the market. Research from Bloomberg, (Better Trading Through Science), has shown that people suffer a higher degree of pain from losing money than they feel pleasure from making money. So they tend to hold on to losing trades rather than sell and lock in a loss. The traders that hold on to a losing position longer than they should always hope the market will bounce back. Unfortunately, that usually comes back around to haunt them later.
One way to combat this thought process is to teach traders to accept all losing positions as a loss before the trade is even liquidated. This helps them to avoid getting attached and forces them to learn how to be accountable. Additionally, the ability to psychologically bounce back from a losing day is an attribute that successful traders possess as it shows resilience in a job that constantly requires it.
Proper risk management- Buying and selling futures contracts can be a risky business, especially with the extreme volatility of prices. The best traders understand the potential consequences of their actions and have proper risk management policies in place to remain in control. This includes setting a daily loss limit for the trade. When monitoring new traders, I determine a trader’s risk management abilities by looking at trade reports that monitor daily performance and provide key indicators such as total number of trades, net profit and loss and win vs. loss ratio.
Another important aspect for mastering risk management is psychological fitness: self-control, accountability, and adhering to self-discipline. A clear head is crucial when it comes to trading – all personal issues need to be pushed out of a person’s mind. The markets move fast, and those who aren’t 100 percent focused on the trade will miss opportunities to excel. Having the psychological control to focus only on the markets is one of the toughest aspects of trading. It takes time to develop, but it’s one of the best risk management practices.
Trader Instincts- Trader instincts can be developed over time by reading charts, learning how to anticipate the market and through dedication. Just like traders must learn to accept loss, they must also recognize that one winning day does not equal success. Building up trader instincts takes a tremendous amount of time and dedication.
To put it into a sports perspective, approximately one in 50 NCAA senior football players will get drafted by a National Football League (NFL) team, which is similar to what futures traders’ experience. In other words, about 1.7 percent of people are dedicated enough to develop the instincts and necessary skills to make it in the “big leagues.” That doesn’t mean becoming a live trader is impossible, but it is very competitive and requires traders to have a real passion for the markets. Eventually they will start to develop the trader instincts that will allow them to anticipate and respond to opportunities.
Traders can become profitable with the right temperament and the willingness to conduct due diligence, but they can’t expect it to happen overnight. Eventually, trading will become intuitive for those who work hard enough to understand and anticipate the market, which ultimately leads to profits. However, trading is a personal journey with different levels of development.
If you’re stuck in a trading rut, stop and ask yourself what you might be doing wrong. The solution to your problem could be as easy as documenting more trades, or it could be a larger issue that requires a specialty coach for insight and input on the market. If the latter is the case, consider contacting a trading service provider to help them hone their skills. Eventually with hard work and dedication, a trader will develop key characteristics necessary for them to compete on the global trading field.
Michael Patak can be contacted at TopStepTrader