Dear Friends! Today we continue our story about secrets of successful traders, which we started in the first part of the article. When coming to the Forex, futures or stock market, beginner traders focus on the search for an efficient trading strategy and development of skills of its application. This is quite natural. However, are there secret ingredients, which could increase the efficiency of their trading? In this second and final part of the article we will tell you about five more secrets, which may improve your trading.
In this article:
- Boredom is good.
- Forget about the rate of profitable trades.
- Making the maximum profit.
- Percentage ratio is insufficient.
- Hope and trading are incompatible.
Boredom is good.
Good trading must be boring. This is yet another trading paradox, which brings us back to the way of thinking of successful traders – “the less you trade, the better the result is”, described in the first part of the article. Many beginner traders believe that trading is a very dynamic type of activity. Perhaps, they watched old movies or TV shows, where traders emotionally shout out their orders in an exchange trading hall. But do exchanges work like this today? To a certain extent – yes. However, the major portion of trades is executed by the traders who trade in a ‘pit’ on portable devices.
The life of a retail trader is completely different. Professional trading is really boring and if a professional trader suddenly starts to behave himself too emotional, it means that something extraordinary has taken place in the market. In an average, 3-to-8 trading setups could be formed during a month for a trader who trades on day timeframes. That is why, having executed a trade, he, practically, has nothing to do but to wait for the closure of the next trading day. This looks very different from what the beginners, who have got acquainted with the financial markets only recently, expect to see.
A professional trader would hardly prefer a breathtaking trading to a boring but stable income. People become traders not for tickling the nerves, but because they like this type of activity, which involves everything from the dynamics of interconnected markets to the price action at the support and resistance levels. If you are looking for an adrenaline rush, there are various types of extreme sports. However, if the trading capital is involved, boredom is just the thing.
Forget about the rate of profitable trades.
The win rate is one of the most widely discussed topics among traders. Besides, it is the most controversial indicator, at least, if we speak about its significance. It should be stated in the beginning that this indicator is absolutely meaningless and the point is this. You do not have to execute more profitable trades than loss-making ones to be on the positive side. Everything you need is to make more on the profitable trades than to lose on the loss-making ones.
This doesn’t mean that you do not need a reliable trading strategy, capable of increasing your success chances. This strategy has to include observance of a proper risk-reward ratio. The truth is that your win rate would not always be at a high level, which means that achievement of stability would be questionable. The idea to execute 80% or even 90% of profitable trades for making a stable income in trading looks breathtaking. It is just not required.
There are two ways of achieving stability in trading:
- The first one is always to follow the proper risk-reward ratio;
- The second one is to apply pyramiding, but only in case you have the sound grounds to believe that the market would continue movement in the profitable direction.
There are many indicators and ratios, which should be on your list, however, the win rate is not among them.
Making the maximum profit.
As we already mentioned before, one of the best ways to achieve the profitable trading is to maximize profit. It sounds obvious, but a bit of explanation is required. The majority of traders try to increase their profits through execution of a bigger number of trades. The problem with this approach is in the fact that it contradicts one of the key principles of successful trading – “the less, the better”. That is why a big number of executed trades would hardly help you to make the maximum profit from the market movements. So, what’s to be done then?
To maximize the profit of those trading setups, which you trade. In the end, if you are patient and enter the market only at the best setups, why don’t you force out the whole potential from them? Due to the use of pyramiding in a stable trend market, you could force more profit out of each executed trade. Of course, in order to achieve it, you need to be very selective not only in the issue to which open position you should apply pyramiding, but also to where you would decide to add a new trade to the already existing one. Efforts to enter the market at a big number of trading setups create only problems. Instead, in order to maximize the profit at each first-class setup, you would have to find those of them, which have the potential for applying pyramiding.
Percentage ratio is insufficient.
If we ask you what share of your trading capital you put at risk in one trade, your answer would probably be 2%. It is an acceptable level of risk, but the idea is in the following. The most painful thing in a loss-making trade is money loss – correct? It goes without saying that namely money is the strongest psychological trigger for the majority of traders and it doesn’t matter whether we speak about the fear to lose the money or greed to make more money. We are human beings and we are used to think in terms of the categories of income and expenditures. Income is always good, which is quite different with expenditures.
Now, let’s thoroughly consider the idea that you should take only 2% of your trading capital at risk. If the size of your trading account is USD 1,000, you can easily accept the loss of USD 20. But what if your capital is USD 100,000? The same 2% now turn into USD 2,000. Are you psychologically ready to accept such a risk in one trade?
It could be that this figure does not bother you personally, but it significantly exceeds the risk most traders are ready to take, even if their trading capital is USD 100,000. Taking this into account, it is more logical to assess an acceptable size of the risk based on the amount you are ready to lose in case of a failure. Of course, this doesn’t mean that you can take USD 500 at risk, having only USD 1,000 on your trading account, even if USD 500 is not a lot of money for you.
In view of this, it is necessary to identify the risk size, taking into account not only its percentage limit, but also a specific amount limit. For example, a trader has the trading capital in the amount of USD 10,000 and he limits his maximum risk to 2% per trade. It means that, in case of a loss, he takes the risk of losing USD 200. Let’s assume now that he accepts USD 150 as a ‘comfortable’ loss for himself, since the risk, which exceeds this amount, results in making emotional trading decisions by him. In this case, the risk in the amount of USD 150 stays within the acceptable 2% of USD 10,000. Thus, a trader manages to minimize the risk and completely accept its money equivalent, which he is ready to lose in a trade without negative psychological consequences for further trading.
Hope and trading are incompatible.
The hope is rather harmless in the majority of circumstances. You can hope for a good weather during your vacation or that the car repair would not cost you much. However, the hope that the market would finally reverse into your direction could have catastrophic consequences. And there are no two opinions here.
As soon as you start hoping for the market reversal towards your side, you start to fuel your emotions. Such emotions could turn into the expectation of what you want to see very fast. Being retail traders we know that the market does not react to our wishes or hopes. It makes what it wants and when it wants and we are not able to influence the final result of market movements.
To become a successful trader means to constantly increase your chances for success. It is a game of probabilities. Everything is simple and clear. We do not speak in trading about keeping your fingers crossed hoping for a favourable outcome of your trade. No one likes to lose money, however, when you start to hope for a win, you undermine the neutral state of your mind, which you need for a stable and profitable trading.
There are many principles and qualities that play their role in the achievement of the trading success. Nevertheless, 10 secrets of successful traders, which we disclosed to you, are the most little-known, which in no way downplays their importance. Rather on the contrary, they are those secret ingredients, which could make even those traders successful who already abandoned all hopes to achieve a stable result in the financial markets.
It might well be that some of the ideas, described in this article, contradict your understanding of trading and it’s normal. Each trader has a unique trading experience, that is why no one is obliged to agree with somebody else’s opinion. However, you shouldn’t jump into conclusions, ignoring any of the described ideas, which, perhaps as of yet, do not have any relation to your trading style.