If you survived Futures Trading you probably stopped doing the 10 things below. If not….
What separates the new amateur trader from the experienced veteran trader is not how they define entries, or which trading tools they utilize, but it goes much deeper than that. In trading, just like in any other profession, experience trumps everything. Typically, most traders follow a similar path and repeat the same mistakes several times before the lesson finally sinks in.
“Most traders will repeat a mistake many times before the lesson finally sinks in.” – Jack Schwager
Through our work with hundreds of traders we identified the 10 main characteristics and differences that separate the amateur from the veteran trader:
#1 Stop changing methods
This point alone will often have a significant impact on the performance of a trader. Every time you change a method or add a new indicator, you reset your learning curve. You have to re-learn everything: how you define entries, how to set your stops and targets, find out under which market conditions it works and which reward:risk ratio works best.
The experienced trader knows that instead of hopping from system to system, he has to stick to one method only and make it work, tweaking parameters and making small adjustments.
#2 See the system as a whole and stop focusing on entries only
Ask a new trader what he believes is the most important component of a trading method and he will name “entries”. Traders who spend all their energy and time on entries alone will never find trading consistency.
A trading system is made up of many different components, and all are equally important. The veteran trader follows a balanced approach, and he is clear about every part of his system. Often, the experienced traders keep a “business plan” where they map out their whole system to make sure they have a thorough understanding of their approach and don’t miss anything.
#3 Stop watching the Profit and Loss(P&L)
New traders always have their floating P&L open and once in a trade, they can’t get their eyes off of it. Watching your P&L change with every tick creates emotional pain and it leads to impulsive decisions.
With experience, traders stop watching how their account balance fluctuates and start focusing on what is really important: trade management and making the right in-trade decision.
#4 Adopt a long-term mindset
New traders lose their heads over a single losing trade and they start doubting their system immediately. The trader who has been around for years understands that one trade alone has no significance and meaning over the course of his trading career.
#5 Honor your stops
Amateur traders see their stop loss orders as something that work against them and for that reason, they will often stop using them all together.
The veteran trader honors his stop and he sees them for what they are. A stop loss doesn’t only allow you to perform a very clear risk management, but it also eliminates emotional decision making. Having a stop loss in place that will get you of once your trade idea is proven wrong is one of the single most important trading concepts.
Stoploss disclaimer: The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders
#6 Simplify the method
Trading is never easy, but it can be simpl(er). At one point, most amateur traders start believing that if they know more, they will be able to make better trading decisions. Learning fundamentals, studying macroeconomic models, applying complex risk management models or immersing themselves into indicator formulas is what then usually happens. More isn’t always better.
The professional trader is very clear about his approach. Although he knows that trading isn’t easy, he understands that it has to be simple. Clear rules for every part of your system, a thorough understanding of what defines you as a trader and what your edge is, are the main characteristics of the profitable veteran trader.
#7 Avoid catching up after a loss
New traders always get their egos involved and they can’t deal with losses. Whereas the amateur trader believes that a losing trade is a sign of weakness and inferiority, the professional trader calmly takes his losses and moves on.
Trying to play catch up after a loss and increasing the position size to make up for losses faster is the quickest way to lose your trading account.
#8 Focus on risk management
It usually takes years before a trader understands the importance of risk and money management. A trader with a mediocre trading system can easily outperform a very sophisticated system if the money and risk management is on point.
The famous Turtle Traders are the best example. Their entry criteria consisted of one single event (the break of multi-day high), but their risk management and position sizing is what really made the difference and what enabled them to generate winning traders.
#9 Avoid rule-breaking and repeating mistakes like a mad man
It is mind-boggling how often the amateur trader will repeat the same mistakes while always getting the same results. Entering trades prematurely, widening a stop loss, taking too much risk, adding to a loser or listening to other people to justify trades are just a few examples.
If you want to make it in this business, you have to stop repeating mistakes and start learning from them.
“Insanity: doing the same thing over and over again and expecting different results.” -Albert Einstein
#10 Preparation and review. Follow a serious routine
The typical trader fires up his trading platform Monday morning and then starts hunting for entry signals. When he is done, he shuts down his computer and goes watching TV. Needless to say that such an approach doesn’t really represent a professional attitude.
The veteran trader starts his trading week on Sunday by performing a market analysis and he writes down his trading plan. He is fully prepared when he sits down at his desk on Monday and knows exactly what he is looking for. After he is done trading, he reviews his session and updates his trading plan for the next day.
Become a veteran trader
There is no reason why you have to go through all those points yourself. Learning from the mistakes of others is the cheapest and most efficient way to improve. Please use the list as a reference and see how you compare to it. Hopefully it can spare you from making some of the costly mistakes yourself.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.