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4 Traits to Master for Trading Success
04/25/2014 6:00 am EST
In his latest book, veteran futures trader George Kleinman shares what it takes to succeed as a commodities and futures trader.
More than 50 years ago, the legendary speculator W.D. Gann discussed the four qualities essential for trading success: patience, knowledge, guts, and health and rest. Gann's observations are just as valid today as they were half a century ago, and trust me, you must have these qualities if you ever hope to compete and win. (If you don't have them now, then develop them!)
According to Gann, patience is the most important of the essential qualities for trading success. A good trader possesses the patience to wait for the right opportunity. If you are a good trader, you will not be over-anxious, because over-anxiousness consumes capital and, over time, will tap you out. When you are fortunate enough to catch a good trade, you need the patience to hold it when it starts to move your way. Perhaps the primary failing of the amateur is to close out a profitable position too soon. In other words, patience is required for both opening and closing a position. Hope and fear need to be eliminated. Gann tells us if you are in a profitable position, instead of fearing that the profit will turn into a loss, you should hope it becomes more profitable. You have a cushion to work with in this case. When you are in a losing position, instead of hoping it will turn around, you should fear that it will get worse. If you see no definitive change in trend, use your essential quality of patience and just wait.
The stakes are high, and the competition is intense. You need a well-thought-out and thoroughly researched trading plan before you begin, and you need to do your homework. Your plan should always have a mechanism to cut the losses on the bad trades and to maximize profits aggressively on the good ones. You must be organized and remain focused at all times. If your plan is a good one, you need the consistency to stick with it during down periods.
My personal goal is to make money daily, but that is not always possible, so I try not to lose too much on losing days. It is a constant trial to maintain the vigilance necessary to not to let good judgment lapse. If you are a novice, it makes sense to "paper trade" before you trade for real. If you are trading currently, you should keep a logbook. Log your triumphs and your failures. You want to avoid making the same mistakes again, but I must warn you, all traders repeat mistakes. At the very least, learn not to make the mistakes so often.
By keeping a record of what you do right and what you do wrong, you can identify areas of weakness and areas of strength. If you are not totally prepared on any given day, don't trade. You can't "wing it" in this business because the competition will eat you up. Over time, you will develop what I call a "trader's sense." You will know when a trade doesn't feel right, and when this happens, the prudent thing to do is to step aside.
NEXT PAGE: 2 Other Traits to Master|pagebreak|
You cannot ignore the danger signals, and when they occur, you must act without hesitation. You must have a game plan and stick to it, but the paradox here is that you also need to be flexible. At times, it is best to do nothing, and you need to fight the urge to play for every pot. And, as I said before, stay focused. At times, I've been distracted by day trades and missed the big move because I missed the big picture. By the time I finally saw the light, it was too late.
Jesse Livermore, the legendary trader of the 1920s, once shared one of his secrets: He attempted to buy as close to what he termed "the danger point" as he could, and then he placed his stop loss. In this way, his risk per trade was low. This makes sense, but how do you know where that “danger point” is? In normal markets, you need to accept normal profits, but on those rare occasions when you have the chance to make a windfall, go for it. But, how can you tell when a market is normal as opposed to extraordinary? It takes experience, and it takes knowledge, an essential quality for success. Knowledge takes study and hard work.
Call it nerve, courage, bravado, or heart; I call it guts, and this one quality is as essential as patience and knowledge. Some people have too much guts, and this isn't good because they're too hopeful and tend to overtrade. Some lack the guts to act (either to enter a position when the time is right or to cut a loss when it isn't). This is a catastrophic fault and must be overcome. You need guts to pyramid positions, which is not easy, but it's where the big money is made. The key is to learn to trade without hope, without fear, and with the right amount of guts. Enter positions on the proper basis and then remember at all times that you could be wrong. You will need a defensive plan to cut your losses when you are wrong. I've been a student in the school of hard knocks many times, but I've never lost my guts. At times, I know I've had too much and have overtraded, but then there are some people I know who have an inability to pull the trigger, and that is just as deadly. Looking back only brings regrets, so you need to face the future with optimism, knowledge, patience, and guts.
Health and Rest
Gann's fourth essential quality for trading success is health and rest. If you don't feel right, you won't trade right, and that is the time to remain on the sidelines. When you stick with something too long, your judgment becomes warped. Traders who are continually in the market without rest get too caught up in the day-to-day fluctuations and eventually get tapped out. At least twice a year, it makes sense to close out all your trades, get entirely out of the market, and go on a vacation. When you return, recharged, your trading will improve.
So, that wraps up Gann's four essential human qualities required for success. You'll need them. This will help you travel the rocky road leading to trading success.
By George Kleinman, Author, Trading Commodities and Financial Futures: A Step-by-Step Guide to Mastering the Markets, 4th Edition
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