This is not a list of “trading rules”; it’s a list of requirements for successful trading. Most worthwhile truths are simple, and this list contains only five items. Like most rewards life offers, market profits are not as easy to come by as the novice believes. Making money in the market requires a good deal of education, like any craft or business. If you’ve got the time, the drive, and the right psychological makeup, you can enter that elite realm of the truly professional, or at least successful, trader or investor. Here’s what you need:
1. A method.
I mean an objectively definable method. One that is thought out in its entirety to the extent that if someone asks you how you take your decisions, you can explain it to him, and if he asks you again in six months, he will receive the same answer. This is not to say that a method cannot be altered or improved; it must, however, be developed as a totality before it is implemented. A prerequisite for obtaining a method is acceptance of the fact that perfection is not achievable. People who demand it are wasting their time searching for the Holy Grail, and they will never get beyond this first step of obtaining a method.
2. The discipline to follow your method.
This requirement is so widely understood by the true professionals that among them, it almost sounds like a cliche´ . Neverthless, it is such an important cliche´ that it cannot be sidestepped, ignored, or excepted. Without discipline, you really have no method in the first place.
3. Experience.
Paper trading is useful for the testing of methodology, but it is of no value in learning about trading. Why? Because the markets are not merely an intellectual exercise. They are an emotional (and in extreme cases, even physical) one as well. To put it mildly, you will find it impossible to approach your task with the same cool detachment you displayed in your living room. This new situation is real, it matters, it is physical, it is dangerous, other people are watching, and you are being bombarded with stimuli. This is what your life is like when you are actually trading. You know it is real, you know it matters, you must physically pick up the phone and speak to place orders, you perform under the scrutiny of your broker or clients, your spouse and business acquaintances, and you must operate while thousands of conflicting messages are thrown at you from the financial media, the brokerage industry, analysts, and the market itself. In short, you must conquer a host of problems, most of them related to your own inner strength in battling powerful human emotions, in order to trade real money successfully.
There is only one shortcut to obtaining experience, and that is to find a mentor. Locate someone who has proved himself over the years to be a successful trader or investor, and go visit him. Observe not only what he does, but far more important, what he does not allow himself to do.
4. Accept the Fact that Losses Are Part of the Game.
The perfect trading system does not exist. Expecting, or even hoping for, perfection is a guarantee of failure. Speculation is akin to batting in cricket. A player scoring 60 runs in a one day match is good. A player scoring 100 is great. But even the great player fails to hit 60% of the time! He even gets out for low scores often. But he still deserves to be called a good player, because although not perfect, he has approached the best that can be achieved. You don’t have to be perfect to win in the markets, either; you “merely” have to be better than almost everybody else, and that’s hard enough.
Practically speaking, you must include an objective money management system when formulating your trading method in the first place.
How about the last requirement for successful tradiing ?
5. The Mental Fortitude to Accept Huge Gains.
This comment usually gets a hearty laugh, which merely goes to show how little most people have determined it actually to be a problem. But consider. How many times has the following sequence of events occurred? For a full year, you trade futures contracts, making 1000 here, losing 1500 there, making 3000 here and losing 2000 there. Once again, you enter a trade because your method told you to do so. Within a week, you’re up 4000. Your friend/partner/acquaintance/broker/advisor calls you and, looking out only for your welfare, tells you to take your profit. You have guts, though, and you wait. The following week, your position is up 8000, the best gain you have ever experienced. “Get out!”, says your friend. You sweat, still hoping for further gains. The next Monday, your contract opens limit against you. Your friend calls and says, “I told you so. You got greedy. But hey, you’re still way up on the trade. Get out tomorrow.” The next day, on the opening, you exit the trade, taking a 5000 profit. It’s your biggest profit of the year, and you click your heels, smiling gratefully, proud of yourself. Then, day after day for the next six months, you watch the market continue to go in the direction of your original trade. You try to find another entry point and continue to miss. At the end of six months, your method finally, quietly, calmly says, “Get out.” You check the figures and realize that your initial entry, if held, would have made a profit of 450,000.
So what was your problem? Simply that you had allowed yourself unconsciously to define your “normal” range of profit and loss. When the big trade finally came along, you lacked the self esteem to take all it promised. Who were you to shoot for such huge gains? Why should you deserve more than your best trade of the year? You then abandoned both method and discipline. To win the game, make sure that you understand why you’re in it. The big moves in markets only come once or twice a year. Those are the ones which will pay you for all the work, fear, sweat and aggravation of the previous eleven months or even eleven years. Don’t miss them for reasons other than those required by your objectively defined method.
[Excerpts from an article by Robert Prechter]
