5 Simple Things All Wealthy Traders Do

06/23/2011 9:00 am EST

Focus: STRATEGIES

Price Headley

Founder and Chief Analyst, BigTrends.com

Even the most successful traders tend to keep things simple, focusing on their methods, being disciplined, and learning from every trade. Here are five traits shared by many of the best in the business.

One of the easiest mistakes any trader can make is not a “trading” mistake at all. Rather, the mistake is complacency with his or her trading skills and knowledge. Unfortunately, trading is not like riding a bike: You can (and will) forget how.

Obviously, you'll always know how to enter orders, but the efficiency and accuracy of your trading will diminish without constant renewal of your trading mindset.

The reason that most traders don't undergo psychological self-development is a lack of time, and that's understandable. However, a good book, DVD, coaching course, or Traders Expo workshop is actually an investment in yourself, and ultimately, an investment in your bottom line.

Today, as a primer, and a challenge, I'd like to review some self-development concepts that Ari Kiev explores in his book Trading to Win: The Psychology of Managing the Markets. This in no way is a substitute for his excellent book, but they are still useful ideas, even in this abbreviated form. None of them are going to be new to you, but all of them will be valuable to you.

Plan the Entire Trade Before Entering

Have an entry strategy and an exit point (both a winning exit point and a non-winning exit point). This will inherently force you to look at your risk/reward ratio. Write these entries and exits down in a trade journal.

Eliminate Distractions

It's difficult enough to find trading time at all if it's not your regular job. If you're a part-time trader who trades at work between meetings and phone calls, think about this: There are full-time professional traders who are concentrating on nothing other than taking your money.

It's not that they're better or smarter than you; they just have the time to focus. If you must trade, set aside blocks of time to study or trade without distraction. Or, it may be more feasible to do your trading on an end-of-day basis, meaning you place your orders and do your “homework” the night before when you can focus on it.

NEXT: More Simple Secrets of Successful Traders

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Pick One or a Few Methods and Stick to Them

Far too often, we see a trader adopt a new indicator or signal only to see it backfire. Become a master of your favorite signals, rather than a slave to any and every signal. Understand that an indicator will fail sometimes, and that's OK. The sizable winning trades should more than offset the small losing trades initiated by an errant signal. This trading method is designed to eliminate the emotional bias of trading.

See related: There’s No “Holy Grail” Indicator

Choose Not to Trade When It’s the Prudent Choice

You'll frequently hear the phrase “Don't fight the tape.” The same idea also applies to a flat market; you can't make stocks do something they're just not going to do. Wait for good entries into a developing trend rather than forcing a bad entry into an unclear trend.

Take Responsibility for Trades…All of Them

Examine why the losing trades failed and why the winners were successful. The reality is that you chose to enter each and every trade. This can be painful, at least initially, since the ego is built to deflect blame yet accept praise. That's a trap. If you find yourself saying "That was a good trade entry, but…," stop yourself immediately. Either everything before “but” or after is inaccurate.

If you rationalize or justify poor trades, then you'll never learn from them. This may be the most important idea of the five: Ego can prevent real learning. If you can learn to accept some failure without being emotionally devastated, then you'll be a good trader.

The only advice I would add to this list is simply to keep a daily trading journal. This can be a journal of trades, signals, ideas, and emotions about your trading. The more you put in the journal, the more you'll get out of it. It will also help you in applying and tracking these five concepts above.

See video: How to Keep an Effective Trade Journal

By Price Headley of BigTrends.com

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