Last week I discussed Chapter 12 of the second edition of Trade Your Way to Financial Freedom, talking about how five investors with totally different ideas, including opposite views on what might happen, could all profit from various scenarios. The five such investors included:
Mary; a long-term trend follower.
Dick; a swing trader.
Victor; a value investor
Ellen; trading on the idea that there is some order to the universe and the markets
Ken; a spreader-Arbitrager
These five people were contrasted with Eric who buys and sells when he gets an urge to do so and Nancy who follows the advice of several newsletters. The reason they can all profit is due to the shared ten common characteristics most good traders have. Last week I gave you five of the ten characteristics, including
A tested, positive expectancy system that's proven itself
A system that fit them and their beliefs
Totally understanding the concepts they are trading
Knowing how to determine 1R and
Being able to evaluate the risk-reward of each trade
Hopefully, you can see how those five qualities would start to generate success. However, I also said there were five equally important (if not more so) qualities and asked you to guess what they are. Let's see how you did.
The sixth key quality is that they all have a business plan to guide their trading. I've been talking about the importance of this plan for years. Most companies have a plan to raise money, but you need such a plan to help you treat your trading like a business. I've done a complete teleseminar on this topic and also a prior workshop. You can learn more about these on my website, plus future tips will also be about this topic.
The seventh key quality is that they all use position sizing. They have clear objectives written out, something that most traders/investors do not have. They also understand that position sizing is the key to meeting those objectives, and have worked out a position sizing algorithm to meet those objectives. We'll be discussing this is subsequent tips.
The eighth key quality is very critical. They all understand that their performances are totally a function of their own personal psychology and they spend a lot of time working on them selves. This area has been my key focus for many years - teaching traders to become efficient, rather than inefficient, decision makers.
The ninth key quality is that they take total responsibility for the results they get. They don't blame someone else or something else. They don't justify their results. They don't feel guilty or shameful about their results. They simply assume that they created them and that they can create better results by eliminating mistakes.
This leads to the tenth key quality, understanding that not following their system and business plan rules are a mistake. We've discovered that the average mistake can cost people as much as 4R. Furthermore, if you make even one mistake per month, you can turn a profitable system into a disaster. Thus, the key to becoming efficient is to eliminate such mistakes.
If you want more information on any qualities, we can help you. In addition, I'd suggest that you look at Chapter 12 to see how these seven traders approached the sample situations that were given and how they made/lost money.
Dr. Van K Tharp