Do You Have the Success Habits of Veteran Traders? Part 1 of 2

08/12/2015 9:00 am EST

Focus: FOREX

Becoming a veteran trader in the world of forex is not an easy task since foreign exchange is high risk, so Tom Cleveland, on ForexTraders.com, outlines seven habits of veteran forex traders. For Tom, the only way to prepare for that risk is to educate yourself on the market.

Do you really want to succeed at trading forex? Is your true goal to record consistent gains over time and prosper from your trading efforts alone? Do you want to develop the right habits that will ensure success? If you answered “Yes” to all three of these questions, then you might want to read the rest of this article and “Part 2” that will follow shortly thereafter. Becoming a veteran trader in the world of forex is not an easy task. The odds are stacked against you, especially when you consider that only one out of ten traders succeed long enough to earn the title of Veteran Trader.

Well meaning disclaimers warn everyone that foreign exchange is high risk. The only way to prepare for that risk is to educate yourself on the market, gain the advice of a mentor—if you can—and then practice the so-called habits of success until they are driven into your consciousness forever. There are no shortcuts to this process. The fact that you are reading this article is evidence enough that you are looking for that edge that will define your art as a trader and lead to the consistent winning trades that you are seeking. And, fortunately for you, veteran traders are more than willing to share their secrets with like minded individuals that truly commit to this profession.

There are numerous articles and books on the nuances of trading, but occasionally, you can find precious nuggets in interviews of wealthy traders when they attend trading conventions. In this and the article that follows, we will share seven habits in each piece that the rich and famous among us have used to their advantage. The habits here are for when you are actually trading, not for your preparation phase of education, strategy development, and practice. Many of these axioms will not be new to you, but others have found significant value in them, especially when viewed from a context of winning.

  1. Money may be your goal, but set other criteria for measuring success.

Make no mistake about it. Trading is a business. You must go to work everyday with that mindset and it would be foolish to think that trading is not about making money. It is, but the slightest thought about money and its many ramifications can corrupt your decision-making process at the worst possible times. Successful traders understand this relationship and choose to measure their success by focusing on other things. It can be as simple as following a set of rules that will ensure a profit, but not a specific amount of money. Markets are fickle. You may benefit greatly on one day and then be lucky to break even the next. Learn to accept what the market is prepared to give you.

In line with this type of thinking, be careful when you approach a market with biased thinking. You may have formed your own opinion about how the market will behave on a given day, based on your earlier reading and preparation, but being a successful trading is not about being right...it is about making money. How many times have you caught yourself trying to force your opinion on the market, screaming expletives at the morons that are moving price in the wrong direction? Smart traders rarely do this. They switch directions on a dime, no matter what biases they had at the start of the day.

NEXT PAGE: What Is Having an Edge Really All About?

|pagebreak|
  1. Winning at trading is about having an edge and acting like it.

Successful trading over time can only come about by tilting the odds in your favor by having an edge. Yes, there is luck in the process, but luck is never consistent, and, if you depend on it, then you are gambling, not trading. After factoring out broker fees, commissions, and the hidden cost of leverage, a successful trader must do better than a 55/45 ratio of net winning dollar trades over net losing dollar trades. In fact, most traders track the history of their trades to determine if they are bettering a 60/40 split. If you achieve this, then the money will come, so to speak.

How do you achieve this edge? If you interview a room full of veteran traders, each will give you a personalized answer and no two will agree. The takeaway is that each trader found his own edge and used it to his advantage. It can be recognizing a specific pattern formation before it is completed. It can be using a certain indicator in a unique way. It can be relying upon Fibonacci ratios to define levels of support and resistance. Whatever you choose to be your edge is your Holy Grail. Refine it and learn under what market conditions it works best. Do not guess, but adapt your edge to the market.

  1. Use technical analysis to gauge the thoughts of buyers and sellers.

Technical analysis can be like our right arm when it comes to trading, but veteran traders often use it in a way that differs from the norm. Yes, they have their favorite indicators and ways of spotting support and resistance or familiar patterns, but they are more concerned with discerning the changing forces exerted by buyers and sellers. It is more than just gauging sentiment. It is about gauging changing sentiment. What are the lines and candlesticks saying about switching allegiances? Learn to gain more insights from your basic chart signals and you will be on to placing better entries and exits.

  1. Base position sizes on risk parameters and the market situation.

Position sizing is another element of trading that veterans do not leave to chance. They do adhere to time-honored formulas that are typically taught as sound risk and money management principles. They do not ascribe to simple round-number stop loss orders like 25 or 50 pips, but rather balance risk and reward with capital at risk, and then, here is the special part, they adjust for market conditions. For example, if you had $5,000 at risk, you would not want to risk more than 2% or $100 on any given trade. Depending on the Average True Range (ATR) for your selected forex pair, leverage amount, and trading time frame, you would calculate your position size.

Typically, you would proceed from there, but only after one other consideration. Veteran traders truly know how to let their winners run, and, when queried, they admit that there may only be one or maybe two times in a month when they are prepared to run hard. Patience is key, but when the trend takes off, they aggressively manage their position sizes upward. The simple truth of trading is that you have to hit it big when the iron is hot and when your intuition and analysis are spot on. Likewise, when the market turns on you, do not waste time, reduce your position size.

NEXT PAGE: The Importance of Using an Uncluttered Chart

|pagebreak|
  1. Know your exit points, for either profit or loss, before you enter your trade.

In keeping with habit #4, veterans leave nothing to chance or guesswork when it comes to exiting the market and they know these key points before they ever establish a position in the market. Each trade stands on its own. As for those one or two times a month when the force is with you, in those rare cases, you will have already determined that the time is ripe for the taking. Your exit will then depend on momentum indicators and how the waves of buying and selling behave.

Once again, formulas are at play. If you accept that risk is very different in a volatile market than in a quiet one, then you want your stop loss formula to be based on simple percentage of a volatility measure like the ATR. If the range for a given day is roughly 110 to 140 pips, then you might use 10% to set your stop loss if you are a day trader, or 50% or more if you are a swing trader. On the profit side, you might be 2 to 3 times this amount, depending on whether you consider yourself conservative or aggressive.

  1. Learn to use an uncluttered chart and forecast future price action.

Newcomers to the trade are always on the lookout for the next greatest indicator or pattern alert system, but, veterans have learned over time that the only thing that matters is simply price action. They prefer a clean chart to a cluttered one. This does not mean that they do not have an indicator or two to help guide their efforts, but their primary focus is forecasting to the right, not researching to the left. Try experimenting a little on your own to predict the next candlestick shape and the one that follows. It does take time to develop this skill, but the more you do it, the more you get accustomed to seeing high percentage moves to support and resistance. After all, trading is all about managing the probabilities in the context of real time market forces.

  1. Wealthy traders gave up picking bottoms and tops long ago.

Do you remember your Greek mythology where sensuous sirens would sing their seductive songs to sailors, only to lure them to wreck upon the rocks and meet their untimely deaths? The legend of Scylla and Charybdis was all about choosing between two evils, and the trading profession has two evils of its own, namely tops and bottoms. A novice trader is sometimes defined as one that is forever asking when the trend will reverse. Veterans learned long ago that this approach to the market can only result in a shipwreck. They know that the meat of a trade is in the middle of a trend, after a reversal has taken place and the new direction has been confirmed.

Trends are much more likely to move forward in a similar direction, than to suddenly change course. The key phrase is “more likely.” There is no certainty in trading and there never will be. You must accept what the market gives you and move on, and the most difficult part is to accept a loss and cut it off at its knees. Experienced traders still have wounds from their early days, especially those from trying to eke out the very last pip before a reversal took place. Give up the practice, if you want to move ahead.

In Conclusion

Have you incorporated these seven habits in your daily trading regimen? Veteran traders do not even think twice about these or the seven habits we will present in “Part 2” of this series. Stay tuned.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.

By Tom Cleveland, Contributor, ForexTraders.com

Related Articles on FOREX

Keyword Image
The Fabulous Shrinking Renminbi
09/27/2017 1:13 pm EST

As of August 2015, renminbi (RMB) in payments globally accounted for 2.8 percent of the total, the f...