This week I was interviewed by TraderInterviews.com concerning some of my thoughts and approaches to trading. If you are interested, you can hear the whole interview (about 20 minutes) by linking to:
http://www.traderinterviews.com/programs/permalinks/TI_10-04-07_BillKraft.htm
The interview got me to thinking about what is really necessary to be a successful trader. While I have written about many of these necessities before, I think it is probably worth reiterating here. First and foremost, the successful trader absolutely must divorce himself from emotions while trading. Of course, that is easier said than done, but most failures occur because the trader takes action in response to fear or greed. Emotions and that "little voice in our head" can get us in a great deal of trouble trading. How many of us have decided we will exit a bullish position at a specific price only to find ourselves letting it go down a few pennies more than we had initially decided and then another few pennies and perhaps another dime until we start to convince ourselves that "it'll come back?" I confess I am guilty though less and less so as I became more and more successful. So, in order to achieve success, we must abandon emotion (difficult as that may be) and rely on strict discipline.
In my view, the only way to achieve strictly disciplined trading is to rely upon technical analysis. If we determine that a specific technical event such as the break through a support, or a MACD crossover, or a DMI crossover or some other technical occurrence will be our exit and then stick to it, we have achieved a measure of discipline that most folks never reach in their trading. If we make the determination and actually adhere to it, we are well ahead of the crowd. It doesn't mean we will have winners all the time; it does mean we will have an effective loss cutting tool and that is critical.
I also believe that simplicity is an important ingredient for the successful trader. Far too many people seek some complex mathematical holy grail and waste inordinate time trying to find the perfect mathematical system for successful trading. I doubt there is any. Many systems work well much of the time, but none are likely to perfectly predict the emotional vagaries of the markets and the markets' reaction to unpredictable news events. If the trader completely understands the strategies he or she is using and has the discipline to cut losses and let profits run, there is little else to do. Naturally, that is easier said than done and goes back to the necessity of removing emotions from the trading decisions.
Successful traders do not expect all trades to be winners. They know that no matter what some trades will go against them. The key here is proper money management. Without good money management, the trader, quite likely, will fail. With good money management, the trader should be able to weather the inevitable draw downs that will occur. If the trader cannot handle the inevitability of draw downs, he simply should not trade. Once again, it is the emotional reaction to a draw down that is the enemy. Good money management as I have set out in previous articles can keep the trader in the game during the times when losses occur and can enhance gains when things are going well.
Perhaps most important of all is to have a solid plan both for overall trading and for each trade. The old saw "plan your trade and trade your plan" should be the foundation of every trade. Several years ago, I was invited to visit the trading floor of a very large brokerage in New York. The head trader told me that in his view the most important thing for a trader was to have a plan; the content of the plan was secondary and could always be changed or tweaked to improve it. Lack of a plan would only result in failure over the long run.
Knowledge, too, is a key ingredient to good trading. Read, study, attend seminars, watch trading DVDs and continue to learn. After all, it is your money and no one is going to care as much about your money as you do. Learn all you can. Trading is no place for the uninformed.
Those things -- formulating a plan, simplicity, discipline, money management, and study -- are some of the most important ingredients to successful trading. I suggest each of us take a close look at how we are doing in each of those areas. If we find ourselves lacking in any category, the effort to improve will most likely be rewarded with better trades.
Bill Kraft, Editor
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