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Effective Habits of Successful Traders: Why Do I Trade?

February 10, 2011 | By

Why do I trade? It’s a simple question, yet the vast majority of traders have not outlined why they trade.  How much time have you spent thinking about it? Have you ever written down why you trade? If you haven’t, how do you know what your true motivations are? Have you sorted out what your objectives are? These are critically important questions you must answer to begin employing effective trading habits.

The journey begins by examining the reasons why you trade and what your objectives are.  Do you trade make money?  Do you trade for the challenge?  Are you bored and want to pass time?  Do you seek the adrenaline rush of the unknown?  Do you want to spend time by yourself?  There are many reasons that people take on the challenge of trading, and your motivations will help determine how you will trade.  They will form your habits and dictate what kind of trader you must become to fulfill the objectives you have.

Why Trading Programs Fail

The vast majority of “trading programs” try to teach you a method or system as if it suits every trader’s personality and objectives.  This canned approach has it backwards.  You must determine who you are and your objectives to have a style that fits you – not a style that is taught as “the golden system”.  Because programs and methodologies are often not matched to the individual trader, the trader opens an account, loses money and then blames the system or program he or she learned.

As a broker, I have countless conversations with traders who are “searching for a new strategy” or “seeing what else is out there”. Yet, I rarely hear traders discuss that they are working on understanding themselves as a trader. Trading is an extension of who you are and how you view markets. If you are very risk adverse, you’re going to need to develop a style where you can risk small amounts of equity while still fulfilling your profit objectives. If you want to take on risk because you like to gamble, you’re going to have strategies with higher leverage ratios and open risk during trades. If you prefer taking long-term bets and building large positions, your risk management is going to be significantly different than a day-trader looking to pick up several points on each trade. Recognizing who you are as a trader helps you determine how you will develop your strategy and risk management techniques.

Understand Your Motivations and How They Affect Your Trading

By understanding your motivations, you will immediately identify why you make many of the trading decisions you do. For example, if you need to have positions on, it means you’re trading for the thrill of it, the adrenaline. The root of this motivation to trade has nothing to do with the markets – the markets simply offer an outlet for you to achieve the adrenaline rush. Here is another example, if you trade fairly well but get impatient and lapse into phases where you take on more contracts than you normally would, this could mean you’re trying to make money quickly, which is never a good trading strategy.

If you are unable to recognize your true objectives for trading, it is extremely difficult to fulfill them!  It means you are likely capable of making decisions that, in retrospect, are very foolish.  I sometimes hear traders say, “I just don’t know what got into me” or “I just wasn’t thinking”.  I believe what they are really trying to say is, “how did I let that happen?  I didn’t even know I was capable of that.” They didn’t know they were capable of it because they don’t know what’s truly motivating them.

Trading will challenge you to make high pressured decisions while under stress.  Your body will instinctually react by letting blood flow from your brain to your body as it thinks it is a “fight or flight” response.  This cuts blood flow to your brain making it more difficult to process information and think clearly.  As such, you need to understand yourself well so you will not let the stress of a situation affect your ability to think clearly – you know why you trade and you have a plan in place.  This is the level successful traders achieve.

The Difference between Successful Traders and Unsuccessful Traders

Let’s contrast reasons for trading from unsuccessful and successful traders.  When I ask the average trader why they do this, I almost immediately and overwhelming hear “for the money of course!” I typically hear an air of dismissal as they are almost shocked I asked.  They believe this is not only the most important reason for trading, they believe it’s the only reason!

What you’re about to read may shock some of you but here it is:  if you solely trade to make money, you are ensuring your demise.  How can this be true?  I believe this because most people who try to only “make money” have a skewed sense of reality in the markets.  It is so utterly important to make money and never have losses to them, that they develop terrible habits that lead them into many losers.  The most common example (and something way too many average traders do) is enter a position and see what happens.  Many times, the trade will begin losing money.  So what do they do?  They sit and wait for the position to “come back”.  Their initial trade idea transforms from a money-making venture into a place where they hope it comes back enough for them to at least break even.  They are so overwhelmed by seeing a negative (red) number that they surrender control to it.  Sometimes the trade does come back and their “hold on and hope” process is validated.  This only makes the situation worse as this becomes a habit.  That is, until the trade doesn’t come back.  When the trade doesn’t come back, losses mount and margin calls are met.  A once average trade is now terrorizing your account.  You’re paralyzed as the trade is overwhelming you.  Finally, the position is liquidated for a massive loss.

Successful traders understand that there are times where it makes sense to exit a position for a loss in order to preserve capital.  They are not attached to their position because they understand they are simply using a financial instrument to achieve their objectives.

There are several variations to the scenario above.  For example, traders add to their position “averaging down”.  Again, they look brilliant when the trade comes back.  But the one time it doesn’t (and the day always comes sooner or later), massive losses are taken.  Legendary trader Paul Tudor Jones said it best, “Losers Average Losers”.  Another example is day-traders indiscriminately trading for no reason other than “trying to make money”.  I hear it frequently, “I just want to make $X a day doing this”.  If this is your reason for trading, I highly recommend you stop, close your account, and never look back.

At the core, most average traders associate successful trading with never taking losing trades.  By having specific risk parameters before putting on a trade and acknowledging that you need to take losing trades in order to achieve your objectives (whatever they are), you manage your risk more effectively.

Are you beginning to see how trading “to make money” doesn’t necessarily make the most sense?  This process leads you into making poor decisions and forming habits that will create misery in the markets.  Thus, you need to start thinking, why do I trade?  Is it just about the money?  If so, what kinds of decisions am I capable of making?  Why else am I doing this?  Do I like learning and gaining experience in the markets?  Would I do this activity if there wasn’t potential profit from it?

How does this compare with successful traders?  Typically, most successful traders possess “self-awareness” and have a thorough understanding of themselves and why they trade.  I typically hear successful traders discuss their trading in terms of:

  1. The Challenge:  Trading is hard and requires significant attention to detail.  This detail is both inner (my psychology) and outer (the markets).  While I understand that the market is a designed to fool and frustrate me, it gives me a landscape to construct and bet on price changes.
  2. The Fun:  I just cannot think of a better way than spend time following and thinking about markets.  It is an ever-changing and evolving landscape that forces me to be adapting all the time.
  3. The Game:  Trading is a three-dimensional, real-life game that results in real-life financial consequences.
  4. The Freedom:  Trading gives me a venue to exercise a limitless set of ideas.  I love the freedom I am given with in my trading world.  I trade when I want and how I want.  If it isn’t fun, I simply walk away from the markets because I know they will be there when I decide to come back.
  5. The Self-Responsibility:  Trading gives me a place where I and I alone are responsible for my trading results.  I take pride in how I act and do not blame others for my financial misfortunes.
  6. The Competition:  Trading is me versus the market, an amalgam of all characters from every corner on earth.  I compete against hedge fund managers, professional proprietary traders, farmers and amateurs like architects, doctors, MBAs, athletes, and students.
  7. The Money:  If I’m playing the game like I should, my reward is money. While I may have started trading “purely for the money”, it has evolved into something more.  I can trade full-time or supplement my income with trading.

There are many reasons for trading – some of them constructive, some of them not.  At the end of the day, it is about understanding yourself and your motivations. I highly recommend taking time to actually write down your reasons for trading and review them often. When you do, you’ll find yourself making clearer and smarter decisions since you have developed an “awareness” of yourself and why you participate in the markets. As time goes on, your reasons may change, so it’s important to keep it up to date. Taking time to complete this exercise is the beginning to better understanding yourself as a trader.  I believe you’ll find trading more enjoyable as you have outlined why you do it and what you want out of it.

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