Saturday, April 03, 2010

Three Core Competencies I See Among Successful Traders

I've been impressed by how different successful traders are in their personalities, their ways of trading, and their ways of viewing markets. There are, however, a few similarities that stand out among those who have made their livings from markets:

1) Thinking in Themes - Traders look at different themes across different time frames, but the good ones synthesize market information and arrive at a view of how their markets are likely to trade. Instead of impulsively buying or selling when a market makes a new high or low or when a chart assumes a particular configuration, they see a broader chessboard: how other markets are trading, how the smaller timeframe fits into larger ones, etc. This ability to synthesize data and arrive at themes is a large part of what helps traders make sense of markets and develop the confidence to take meaningful risk in search of superior rewards.

2) Managing Risk - The successful traders lose, and many times they lose frequently. But they know how to lose. They define their acceptable losses in advance and ensure that their largest winning trades will make far more money than they lose from their largest losers. They keep daily, weekly, and monthly losses under control, so that they can learn from losing periods and return into the black once they see markets well. The really good traders go into slumps like the rest of us, but they don't draw down very far during those periods.

3) Staying Flexible - Successful traders have the ability to place big bets on views they feel strongly about, and yet they also have the ability to change those views promptly when markets no longer confirm their expectations. This mental flexibility is what enables a trader to catch breakouts from ranges, as well as the ends of trending moves. The really good traders mentally rehearse a variety of market scenarios; they don't just get married to one. This prepares them for rapid action when they see one of those scenarios unfold in real time.

Understanding how *you* trade when you're at your best is perhaps the single most important thing you can do to move your performance forward. If you understand *your* three core competencies during your successful periods, you're more likely to draw upon those with greater consistency--particularly if you can transform your best practices into firm trading rules.