Depending on who you read when studying investment, you’ll find slight differences in the composition of the list of key characteristics, but they all share deep, fundamental similarities. This list is adapted from Rotella:
We’re listing this one first both because it’s probably the most crucial psychological element, and because it’s the most difficult for a person to change. Here, we’re specifically talking about your ability to control your thoughts, emotions, and actions.
These things are critical to your success, because the moment you start letting your emotions control your actions, you’ll start making irrational, illogical decisions that will ultimately cost you dearly.
Everybody likes to win. One trait we often see in novice traders is the tendency to blame others (or the market itself) when they make a losing trade. This is a kind of psychological balm. It makes you feel better because you can say “it wasn’t my fault,” but ultimately, it’s a self-defeating mindset. Only when you take full responsibility for your successes AND failures can you begin to identify problems with your trading strategy and work to improve them.
YOU are responsible for each and every trading decision you make. Even if you work with a broker, your broker will never “make” you do something (buy or sell). He or she may make recommendations, but ultimately, the decision about what to do is yours.
Markets tend to be a bit like the “Wild West.” There are few rules and little structure. If you’re the kind of person who needs structure, you’re probably going to struggle in the world of investing. Here, the development of a structured, rules-based trading system and strategy can help, but only to the extent that you constantly test and refine those rules to continually strengthen and improve them.
Because you’re responsible for all your own decisions, because there are few rules, and because markets tend to be loosely structured, the most successful traders are the ones who can think creatively and operate independently without needing the approval of some external authority.
Acceptance Of A Lack Of Control
Most people try to control as many elements of their personal lives as they can, and by and large, they succeed. Unfortunately, such control is impossible when dealing with the market.
Not only will you never fully understand the market, but you, as an individual trader (one of millions) will never be able to exert any meaningful control over it. If you can accept that, you’ll tend to thrive. If you can’t, you’ll find yourself struggling constantly.
Markets tend to be highly fluid and ever-changing. Strategies that worked well six months ago might suddenly be rendered ineffective, requiring you to think quickly and make changes on the fly. If you can do that – if you’re flexible enough to change with the prevailing conditions, you’ll tend to do well.
Making decisions is (relatively) easy. ACTING on those decisions…that’s orders of magnitude harder, but at the end of the day, that’s what matters most. Remember that doing nothing is making a decision by default, so you have to act.
The best and most successful traders can reliably analyze the current situation, decide the best course of action, and then do what needs to be done without hesitation. As fluid and ever-changing as markets are, there’s no room for doubt or second-guessing.
Resistant To Stress
Trading is stressful. Anyone who says otherwise is being dishonest. If you can’t handle stress, you should probably find something less stressful to do, because it’s a fact of life in the world of investing.
If you take nothing else from this course, never, ever, EVER allow your emotions to rule you when making investment decisions. That only ends one way, and never in your favor. It is absolutely essential that you not let your ego or your emotions get in your way with regards to doing what needs to be done in the context of any given trade.
Many of the most successful traders say that they can actually “see” or watch themselves trading as though they were an observer, rather than the person doing the trading. Seek to emulate that as much as possible.
You don’t have to make a trade every day. You don’t have to make a trade every hour. In fact, you shouldn’t. The ONLY time you should enter into a trade is if and when your analysis indicates that it’s a good opportunity with an acceptable reward:risk ratio. Never trade out of boredom, or out of a perceived need to be doing something. The only thing that leads to is loss of equity.
The best traders are like everybody else. They love what they do and are both enthusiastic about it and committed to learning as much as they can, which of course, only serves to make them better and more effective traders. It’s a virtuous, self-reinforcing cycle, and that’s a very good thing.
Decent traders make decisions based on solid analysis. Exceptional traders rely on analysis, but very quickly develop reliable instincts about trades. This is fundamentally different from “trading with your gut,” and involves applying thoughtful application of your growing body of experience to the current trade.
This gives you the ability to just “know” what to do in any given situation, because even if you haven’t encountered that specific situation, you can draw from your body of existing experience to understand the likely outcomes of whatever decision you opt to make. That’s invaluable.
Rotella takes things a step further, and concludes that all of the above are derived from just three things:
• Introspection – Knowing your strengths and weaknesses
• Confidence – A strong belief in what you’re doing, and in your ability to do it well
• Perseverance – The strength of character to see your plans through, and to tweak and try again should you fail