Trading Secrets Of The Consistent Losers

It's a good idea to study the habits of "successful losers" to learn how to avoid joining them. When you look at losing traders, they seem to have certain habits in common, among which is that they enter the trading arena ill-equipped. Each enters without one or more of the following:

• Adequate confidence
• Adequate funds
• Adequate planning
• Adequate understanding.

INADEQUATE CONFIDENCE

Trading without confidence is a foolproof way to lose money. But how do you gain confidence in an arena that is entirely new? There are a couple of ways:

1. Find a method that is a proven winner and test it yourself. Don't simply listen to your brother-in-law, your best friend, your broker, or anyone else. Prove to yourself that your method works and that it feels comfortable — that it suits your personal trading style.
2. Paper-trade your method for a while (you get to decide what "a while" means). See what it feels like to go through its mechanics. Establish a sense within yourself of "I can do this!"

With these two disciplines securely in place, fear is less likely to pollute your trading perspective. FEAR, or "False Evidence Appearing Real," has no place in the successful trader's psyche.

INADEQUATE FUNDS

Statistics show that underfunded traders experience a huge disadvantage in the markets. Several exchange-commissioned studies confirm this.

If you view your trading like any other business venture, it's easy to see why adequate funding is so important. Surprises occur; the unplanned-for can and will happen. Without some degree of cushion, your only option may be to exit a trade at a substantial loss. Bad for the pocketbook, bad for trader self-esteem, bad all around!

How much should you start with? There's no easy answer, although most will tell you between $10,000 and $25,000. This is a good general rule, although you can start with less.

INADEQUATE PLANNING

Your trading plan is your blueprint for success; its absence or incompleteness is your blueprint for failure. Your plan has to answer all the hows:

• How do I decide when to enter, and at what price?
• How do I decide on trade size?
• How do I decide how much to risk?
• How do I communicate this to my broker?
• How do I protect myself against unforeseen moves against me?
• How do I protect my profits?
• How do I determine the risk/reward of the trade?

As well as all the what-ifs:

• What if I was mistaken?
• What if I was right?
• What if my profits get huge quickly?
• What if my computer crashes in the midst of a day trade?
• What if my emotions take over?

I could go on, but I trust you see the point. This plan is your roadmap; it will deliver you safely to your intended goal. Without it, you'll be wandering around lost, dazed, and confused. And, eventually, broke.

INADEQUATE UNDERSTANDING

New traders sometimes ignore the fact that there are opportunity costs related to starting, and maintaining, a career in trading. Many simply assume they will enter the fray, make a killing, and live happily ever after.

The reality? There's a price to be paid in learning the ropes. Especially in the beginning, there is a strong likelihood that you'll mess up, that you'll make mistakes and take unwarranted losses. This is the price tag attached to your learning curve, and it should be factored into your expectations.

The other aspect that is widely misunderstood even by seasoned pros is that having no positions is a position. Many feel they have to be in the thick of the markets at all times. Otherwise, they ask themselves, "What am I doing here?"

The answer? You are waiting for a trade that fits all the parameters of your trading plan and looks and feels right. Yes, waiting is the other part of trading. The temptation to "have a position" is always there; just remember, staying out is also a position.

WRAPPING UP

I can't stress enough the importance of having everything you need to trade in place. Being properly equipped for your adventures in trading is the antidote to the setup for failure that is so commonplace today.

Compounding all this, of course, is the false glamorization of daytrading that you read and hear about. If you believe those promoters, all you have to do to succeed is show up with your money. You and I know that to be a successful trader for the long term, you must show up with more.

R.M. Sidewitz is chief executive officer and founder of Qi2 Technologies, LLC, an investment management company, and the managing member of Qi2 Partners LP, a domestic hedge fund. His website is www.cybrlink.com.

Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.