I have been asked many times what it takes to become a successful trader, and I want to take a moment to provide some guidance on the subject. While I clearly am unable to provide a treatise as to what will make someone a great trader, I want to at least provide some insight for those that have asked me this question more times than I can count.
If I had to explain where one should begin to their quest to become a successful trader/investor, I would probably quote Shakespeare:
“This above all: to thine own self be true.”
First, I want to say that day trading is not for everyone. Yes, you heard that right. Anyone who knows a bit about running knows that it takes different talents and training to run a marathon as it does a sprint. This same perspective applies to trading as well, as day trading is akin to sprinting, whereas investing is akin to a marathon.
The first question a person must be able to ask of themselves honestly is what is the best way for them to make money in this market which best suits their personal proclivities, perspective and talents. And, if one engages in that self-assessment honestly, many will appropriately come to the conclusion that day trading is not for them. Personally, I have learned that I am a much better swing trader than a day trader, as swing trading is a better fit for my temperament. But, I had to come to that conclusion on my own and be honest with myself about my own limitations. Yet, Larry White, the analyst on my site who runs our miners short term trading service, earned total returns for our members of over 400% in 2015 doing mostly day trading.
Second, one needs a methodology that is objective and consistent. Since we all know that, when money is on the line, human beings allow their emotions to take control. To allow emotions to affect your decision making can be devastating to a trader. This is why the methodology you use should be objective and should provide you with a defined risk management system.
In fact, in any trade you contemplate, your methodology should outline your entry, exit (target) and stop out (failure) points before you even enter the trade. And, most importantly, you must adhere to these predefined points consistently, or else you will be wrongly allowing your emotions to play a role in your process, and I will guarantee you that, over the long term, it will cause you to fail.
While there are still many more factors which will make one a successful trader, the third factor I want to cover in this article is position sizing. There is a mistake that investors and traders both make, which often leads them to blowing up their accounts. They come across those “cant lose” trades, and decide to put a significant amount of their capital in that trade. Clearly, when that trade goes bad, so does their overall account.
For this reason, I believe it is of utmost importance for any trader or investor to limit any position they take on a single stock, or even within a single industry, to a certain percentage of their overall account, in addition to using stops, as suggested above. For example, I suggest to keep positions in any single stock to no more than 5% of your overall portfolio value. You see, there never is a “can't lose” trade. Any trade for which you view this as your perspective is one in which you clearly have not recognized the downside to the trade. And, I can assure you that the old phrase “a fool and his money are soon parted” will be applicable to such a situation.
So, while there is no specific key which will make a person an expert and profitable trader, there are certain aspects of trading/investing which people can focus upon which will improve their chances to succeed. I hope I provided you some ideas upon which you may ponder, and hopefully put into practice, which will improve your overall success.