When I started trading back in 1996, I naively thought that trading was easy. A quick way to get rich. Truth is, it’s very hard to be consistently profitable. I recall an article produced by Bear Stearns in the late 1990’s which broke down the failure rate of traders. With their data, they shockingly revealed that 93% of traders fail. I couldn’t believe it! That seemed alarmingly high! Over the next 27 years of trading my own money, having worked with retail & institutional traders as well as teaching thousands of traders, I’d have to say that number seems pretty accurate.
At a foundational level, it boils down to 5 simple things that will point all traders to the ultimate goal: Becoming a consistently profitable trader.
#1 – Have a trading plan.
A trading plan is an essential tool that every trader should have. I personally think this can be split into 2 plans: The business plan, and the trading plan. The business plan is higher level and focuses on all your macro questions. Why are you trading? What is your goal? What markets do you trade best? What is your optimal share/contract/lot size? What is your trading strategy? How are you choosing your trades? What are your risk management rules? What is your maximum loss per day/week/month? What will you do if you go on a losing streak? It is a comprehensive set of guidelines that help you make consistent trading decisions.
The trading plan side of this should be a written document for each trade you make. Why are you making this trade? What makes it a good trade? What is the worst-case scenario? What are your entry & exit points? Targets & stop loss?
A well-designed trading plan helps you to avoid impulsive decisions and stick to your trading strategy. If you don’t know the answer to all these questions, make sure you look at point #5 below.
#2 - Manage your risk.
Risk management is the most critical aspect of trading. Remember this: Trading is NOT about making money; it is about not losing money! Making money as a trader is a byproduct of not losing it. Successful traders understand the importance of managing their risks and never risking more than they can afford to lose. You should always use stop-loss orders to limit your potential losses and diversify your portfolio to minimize risk. You should also consider using position sizing to manage your risks effectively.
#3 – Use your tools!
There are so many amazing resources out there that can help you scan, filter, access, and target securities to trade. It doesn’t matter if you trade Options, Futures, Forex, Stocks, Cryptocurrency or beanie babies! There are resources which can help you. A professional baseball player doesn’t have to wear a glove, but it sure makes his job a heck of a lot easier! Barchart.com has just about every tool you could want to help make your trading easier. Looking for big movers Pre-Market or Post-market? Want to see all the companies with earnings releases in the next 7 Days? Bottom fishing for stocks which have gapped down overnight? Want to see what is the hottest sector of the market? Looking for Barchart’s Top Stock Picks? There are hundreds of other data analysis tools available, all designed to take some of the workload off your plate. Let software filter and scan for you. Then you can focus on the higher probability trades which fit your trading plan. Finding the tools that you like best will take time and practice. Ultimately, you will find a few tools which will make your trading more consistent and efficient. Add these to your plan and continually look for tools to make your trading even better.
#4 – Do your own research.
In 1998, I was a trader on a retail trading floor along with about 180 other traders who all thought they were exceptional. They would often give me stock recommendations and tout their trades as guaranteed winners. However, having connections with the back-office staff, I learned that most of these traders were actually losing money. There are 14-year-old kids living in their parents’ basement with a $100 account giving out stock picks! Unfortunately, such individuals have millions of followers on social media. I’m fortunate to be one of the 69 contributors at barchart.com. I read a lot of other authors which help me cover more markets and sectors for my personal trading. Don Dawson, a commodity trader with 35 years of experience, is one of my personal favorites, and I always gain valuable insights from him despite my 27 years of trading experience. It is crucial to continue learning as a trader and seek out useful information. However, it is vital to conduct your own research and not blindly follow recommendations. Always verify the credibility of the information and its alignment with your trading plan, risk-reward ratio, and personal judgement before taking any trade. If there are any discrepancies, it is better to pass on the trade and look for other opportunities.
#5 Review your trading plan.
The financial markets are continually evolving, and to be a successful trader, you must adapt to the changing conditions. It’s important to review your trading plan at least once a year and evaluate what is working and what is not. It is critical to avoid making too many changes at once. Instead, focus on implementing one modification at a time and assess its impact on your performance. This process may take some time, but it can provide valuable insights into what strategies work for you and what do not. Additionally, maintaining a trading journal can be beneficial as it enables you to identify patterns in your trading behavior and pinpoint areas that require improvement. By carefully analyzing my trading and trade plan, I learned the times of day which I made & lost the most money, which stocks I made and lost the most money on, what was my optimal share size and so much more. Business owners do this all the time to understand what is selling and what is not. Always be analyzing your trades and update your plan when you learn more about yourself and your trading habits.
Trading is a journey with many ups and downs along the way. Even with these five key components, traders can still fail. In my experience, I believe that the 93% of traders who fail all started out with great intentions. Yet when push came to shove, they violated their trading rules. More likely, they didn’t have any trading rules to begin with. Without a strategy or rules, success will be very difficult to come by. As one of my mentors used to say, “If you don’t know where you’re going, any path will take you there”.
To achieve success in the long run, it is crucial to have a clear understanding of your goals and the essential actions required to reach them. The pivotal factor lies in avoiding significant losses in your account and continuously learning from your errors. It is imperative to recognize your mistakes, learn from them, and enhance your trading abilities through the process.
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On the date of publication, Merlin Rothfeld did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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