Trading is an elimination game—most players will eventually wash out and be forced to find another vocation. The minority that succeed share common characteristics. Less skilled traders can improve their performance by understanding the rules, techniques, and mindsets that successful traders use to build their fortunes. (See also "The Importance Of Trading Psychology And Discipline.")
The path from amateur to professional trader requires many years of experience and experimentation with a broad variety of strategies. This learning phase inevitably includes long stretches of trial and error in which the journeyman trader questions whether or not the activity is worth the high financial and emotional costs. Many folks never get past this point because they realize that trading for a living requires a level of commitment they aren’t prepared to take.
Find a Mentor
A good mentor can reduce this learning curve significantly. Some of the best and most natural mentorships happen on the job. If you’re ready to take the plunge and trade professionally, find a job in a proprietary shop. There, you will be taught specific strategies that test your natural skills and determine your suitability for this business.
At-home traders need to find their mentors on the Internet. Choose wisely because many online gurus are more interested in newsletter subscriptions than helping others achieve success in speculation. At the same time, it isn’t fair to ask these folks for help without paying for it because they know that few traders take the business as seriously as they do and don’t want to waste their time
Professional traders have learned from years of experience that controlling risk works more reliably in building long-term profits than chasing gains. This conflicts with the mindset of amateur traders who are invariably focused on profits. Often, amateur traders do not understand how much money can be lost on bad or poorly managed positions. Greed plays a huge factor in this mindset because the hunt for profits blinds many folks to the actual requirements for making profit and keeping it.
Cultivate the Right Mindset: Abundance Versus Scarcity
Top players understand that a healthy and positive relationship with money is required to make more money. Unfortunately, most amateurs come into the game feeling overwhelmed by debt, family pressures, and even anger that others are enjoying the good things in life while they struggle. This fosters a scarcity mentality that undermines their prospects for long-term success. Some amateur traders are further hampered by viewing wealth as a source of evil, due to the extremes of our have and have not society.
This deep-seated conflict highlights the need to manage the psychological side of the trading game while building long-term market identity. Start by doing whatever it takes to make the leap to a more professional attitude about wealth and prosperity. Visualization offers an excellent method to remove roadblocks to accumulating wealth. Other traders find keeping a journal works better. Whatever the method, focus on reaching an internal natural state of abundance.
Plans and Strategies
At-home traders chase bullish or bearish strategies that take advantage of the market environment currently dominating the financial headlines. Professionals, however, know that long-term survival depends on a carefully crafted approach that addresses all market conditions. In fact, successful traders are often willing to forgo short-term profits while they work through the details of these strategies. They let other players chase their tails with the latest hot stock or sector. They know their patience will pay off when conditions finally change, which they always do, and seemingly bulletproof trading systems blow up in the face of their adherents. (See "How Market Psychology Drives Technical Indicators.")
Develop a Trading Plan
At the same time, the professional develops a detailed trading plan that organizes their skill sets into a variety of core disciplines, knowing these elements may come into play at any time (see 4 Key Elements To Create A Successful Trading Plan). These start with the basics of fundamental and technical analysis and then move into classic applications that include, but aren’t limited to, the following:
• momentum trading (see The Importance Of Managing Risk In Momentum Markets)
• short selling (see Rules and Strategies For Profitable Short Selling)
• pattern failures (see How To Trade & Profit From Pattern Failures)
• entry and exit strategies (see Must-Know Simple & Effective Exit Trading Strategies)
• scalping (see Top Technical Indicators For A Scalping Trading Strategy)
• scaling (see Effective Risk Control With Scaling Trading Strategies)
• tape reading (see How Important Is Tape Reading In Modern Markets?)
• long-term positioning (see Step Back From The Crowd & Trade Weekly Patterns)
• moving averages (see Strategies & Applications Behind The 50-Day EMA)
• relative strength and weakness (see Analyze Relative Strength On Your Trading Strategy)
Finally, the professional trader builds a trading edge through a systems approach that measures results on a weekly and monthly basis (see The Vital Importance Of Defining Your Trading Edge). They keep detailed journals of real-time market observations that force a constant readjustment of strategies to improve and optimize results. Meanwhile, they develop risk slowly, learning how new strategies work with limited capital before taking big positions. Once satisfied with the results, they use margin under narrowly defined technical conditions to build profits. In contrast, amateurs blindly take margined risk that threatens to blow up their accounts.
Rules of Engagement
No single position is important to the professional trader. Instead, they think in terms of baskets that include multiple positions that work in synchronicity or through diversification. One set of strategies may show greater profit, allowing higher exposure, while others fail and are terminated for relatively small losses. As trade management develops, professional traders look to the entire basket for their profit and loss analysis, rather than the performance of a single position or strategy.
Successful traders make small changes to their broad strategies as experience guides their risk taking. They generally do not fixate on a single big win or loss as long as the balance of the basket performs according to high expectations. They control their emotions when things go haywire, as they do from time to time. Successful traders allow the numbers to guide trade management, rather than replaying mistakes in the middle of the night and letting fear dictate their actions at the open bell.
Professionals take exits more aggressively than amateurs when it’s time to get out, whether taking a profit or a loss. They understand that market conditions can change violently in a short period of time, given the right catalysts, and that well-timed exit strategies can mean the difference between long-term success and failure. They also understand that profitable trades are like trains rolling down the tracks. Miss one, for whatever reason, and another one is already lined up and headed in your direction.
The Bottom Line
Professional traders develop a healthy relationship with money and capital before they take risk, to ensure that scarcity issues don’t interfere with their decision making. They spend a longer time than peers building strategies and skill sets because they know their positions must address all types of market conditions, not just those in play during a given day, month, or year.