Many successful professionals from other fields struggle when they try to trade for a living. One big reason is that trading has several crucial aspects that run against our intuition. Here, you’ll find seven trading tips that explain these aspects and help to improve our odds in this worthy challenge.
If you pay attention to what top traders say, you will find common themes like the importance of risk management, trading psychology, and emotional resilience. These are general topics that are relevant for all traders.
How about more concrete takeaways? This is what you will find here.
In this article, we have distilled the advice of top traders into seven essential tips.
While these tips may defy our initial intuition, they are grounded by the experience of seasoned top traders and bring us closer to the reality of trading.
Read on to learn about what top traders and investors shared from their extensive experience.
(Instead of introducing the traders as we discuss what they say, there is a list of links for you to find out more about the quoted traders at the end of this article.)
Tip #1: Trading more or longer is not better.
At times, doing nothing might be the best thing you can do.
A lot of people get so enmeshed in the markets that they lose their perspective. Working longer does not necessarily equate with working smarter. In fact, sometimes it is the other way around.Martin Schwartz
Most jobs are designed around the clock. Spend X number of hours, and we pay you Y amount. This relationship between time spent and reward is so commonplace that we take it for granted in all things that we do.
Unfortunately, it does not hold true for traders who want to maximize their edge.
As Martin Schwartz pointed out, we need to work smarter and not longer.
Most importantly, the market is beyond our control. Of course, we can decide to spend more time trading, but if the conditions are not optimal, it will do more harm than good.
The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.Jesse Livermore
Like Jesse Livermore said, we need to get away from the “regular wages” mindset and respect the market’s underlying conditions.
Think about it. If the market is not offering you a trading edge, the best thing you can do is to stop trading.
If most traders would learn to sit on their hands 50 percent of the time, they would make a lot more money.Bill Lipschutz
Bill Lipschutz’s opinion highlights the fact that most traders trade far more than they should.
Paradoxically, the best traders know when not to trade.
Tip #2: Trading is not about the market; it’s about you.
Analysts worry about the market.
But traders go beyond. They think about what to do in response to the market.
Don’t think about what the market is going to do; you have absolutely no control over that. Think about what you’re going to do if it gets there.William Eckhardt
William Eckhardt was clearly referring to having a game plan for all possible scenarios. Your trading plan is about you – how you plan to respond to the market.
But it goes further than having a detailed technical trading strategy with entry and exit rules. This focus on you extends into your mind.
Most people think that they’re playing against the market, but the market doesn’t care. You’re really playing against yourself.Martin Schwartz
We tend to focus on the market’s behavior as we try to figure out how to trade profitably.
But in fact, we should spend even more effort and time to figure out our emotions, instincts, and responses. This is why trading psychology is so important.
There are only a few traders who have come to the realization that they alone are completely responsible for the outcome of their actions. Even fewer are those who have accepted the psychological implications of that realization and know what to do about it.Mark Douglas
Once you understand your role as the trader, you will see the need to take full responsibility for your trading. However, as Mark Douglas pointed out, it is a challenging thing to do.
Tip #3: The focus is not on winning. It’s on not losing.
Making money is the goal of trading, so it makes sense for new traders to focus on making money from the markets.
They ask questions like these:
- How can I make the most money?
- Which strategy is the most profitable?
- What leverage can I take on to maximize my earnings?
But these are the wrong questions to focus on.
With luck, anyone can make money. But it takes more than chance to make money without running the risk of ruin.
The risk of ruin is the probability of ruining your trading capital to the extent that you can no longer execute your trading plan. The key is to stay in the game long enough, so that you can profit.
This is why Paul Tudor Jones emphasized the need to preserve your trading capital.
I’m always thinking about losing money as opposed to making money. Don’t focus on making money, focus on protecting what you have.Paul Tudor Jones
An obsession with risk and how much you can lose is the hallmark of professional traders and investors.
My largest positions aren’t the ones I think I’m going to make the most money from. My largest positions are the ones where I don’t think I’m going to lose money.Joel Greenblatt
Our intuitive focus on profits creates a tendency to trade positions that are too large and risky.
This explains why Bruce Kovner suggested cutting our positions by half. This advice might sound simplistic, but it highlights a real and common problem of overtrading.
Risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half.Bruce Kovner
Tip #4: Demanding for certainty is not productive.
Humans hate uncertainty.
Security means a lot to us, and we naturally seek certainty in our endeavors. And for the most part, this approach to life works pretty well. Having security in life allows us to focus our energy to achieve more.
However, this natural tendency to demand certainty is at odds with the market’s behavior and can damage trading performance.
The most effective and functional trading belief that he can acquire is ‘anything can happen’. Aside from the fact that it is the truth, it will act as a solid foundation for building every other belief and attitude that he needs to be a successful trader.Mark Douglas
As Mark Douglas pointed out, it is crucial to realize and accept that “anything can happen.”
Accepting uncertainty is critical for all market participants, regardless of whether you are a day trader or a pension fund manager.
As a trader, if you insist on certainty and want the one true answer, you will be stuck in a vicious cycle.
There is no single market secret to discover, no single correct way to trade the markets. Those seeking the one true answer to the markets haven’t even gotten as far as asking the right question, let alone getting the right answer.Jack Schwager
I trust Jack Schwager on this. He has interviewed dozens of top traders, and I highly recommend his Market Wizards series.
So how should traders cope with the inherent market uncertainty?
Veteran trader Linda Raschke has a great piece of advice for us.
In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future… Thus the successful trader does not base moves on what supposedly will happen but reacts instead to what does happen.Linda Raschke
To paraphrase her:
- The markets are inherently uncertain because humans are.
- The successful trader is an expert at managing uncertainty.
In a nutshell, accept uncertainty and learn to manage it.
Tip #5: A trader does not need to be a genius.
Smart people succeed. That’s what most of us think.
But intelligence is secondary for trading successfully. Peter Lynch has a more specific opinion on how academically competent traders need to be.
All the math you need in the stock market you get in the fourth grade.Peter Lynch
So if intelligence is not the key to trading successfully, what is?
The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading.Victor Sperandeo
If you have sufficient trading experience, you would have struggled with issues like overtrading, losing streaks, and revenge trading. So you will agree with Victor Sperandeo. But we can benefit from a reminder from time to time.
If you are new to trading, I might not have convinced you of the importance of the emotional side of trading. But keep this idea at the back of your mind, and hopefully, it will shorten your search for the Holy Grail.
(We are referring to conventional intelligence here. But if we adopt the theory of multiple intelligences, a high intrapersonal intelligence would benefit traders.)
Tip #6: The harder you try to make money, the harder it is for you to do so.
The goal of a successful trader is to make the best trades. Money is secondary.Alexander Elder
Focusing on making the best trades means focusing on the process.
When you focus on the process, you will find ways to improve.
When you focus on the results, you will find distractions as you hop around without a consistent approach.
So let the money be a by-product of a solid trading process.
Bill Lipschutz put it well:
If a trader is motivated by the money, then it is the wrong reason. A truly successful trader has got to be involved and into the trading, the money is the side issue… The principal motivation is not the trappings of success. It’s usually the by-product – simply stated, “the game’s the thing”.Bill Lipschutz
A related point – anyone who is facing financial difficulties should not trade. If you feel that you have to make money, that presents a distraction to your trading performance.
Tip #7: How often you win is less important than you think
Traders often seek high win rates. However, the effort to ensure high hit rates is often misplaced because the win rate is only part of the equation.
The most critical equation a trader must know:
Expectancy = (Winning Probability x Average Winning Amount) – (Losing Probability x Average Losing Amount)
That is it. This line encapsulates what trading is all about.
Simply put, our job is to ensure that expectancy is positive.
Positive expectancy is a core concept for traders, and no one should trade without a firm understanding of it. This is why the final volume of my trading course is titled “Positive Expectancy”.
If you understand expectancy, you will understand these quotes from Paul Tudor Jones and George Soros.
5:1 (risk /reward). Five to one means I’m risking one dollar to make five. What five to one does is allow you to have a hit ratio of 20%. I can actually be a complete imbecile. I can be wrong 80% of the time, and I’m still not going to lose.Paul Tudor Jones
It’s not whether you’re right or wrong that’s important, it’s how much money you make when you’re right and how much you lose when you’re wrong.George Soros
It does not mean that we avoid high win rates.
What is crucial here is to appreciate that a profitable trading strategy can take on different profiles.
It might have a high or low win rate; it might involve large or small average wins/losses. (There is usually a trade-off between win rate and average net profit.)
But it does not matter as long as your strategy produces positive expectancy.
What matters is to ensure that you are financially and emotionally prepared to handle the risk profile of your trading strategy.
- For strategies with low hit rates, can you accept multiple consecutive losses without falling into revenge trading mode?
- For methods with high win rates but occasional huge losses, do you have the capital to sustain the less frequent but huge losses?
These counter-intuitive bits of advice explain why trading is not the easiest way to make money for most people.
But suppose your primary goal is not to make money and that you want to learn from the process and develop yourself.
Then, you will enjoy the challenge of trading because it forces you to question your assumptions and face your emotional flaws. If you succeed, beyond the financial rewards, you will learn valuable life lessons.
However, because these ideas and advice are not intuitive, it’s almost impossible to heed them effectively right from the start. It takes trading experience, consisting of disappointment and regret, to internalize them fully.
Nonetheless, by reviewing and reflecting on them, we can shorten our journey toward becoming mature and consistent traders.
The Top Traders and Investors
In this article, we have quoted from many top traders and investors.
Here is a list of links for you to learn more about them and their prominent publications. Have fun!
- Martin Schwartz – Author of book Pit Bull: Lessons from Wall Street’s Champion Day Trader
- Jesse Livermore – Legendary trader featured in Reminiscences of a Stock Operator
- Bill Lipschutz
- William Eckhardt
- Mark Douglas – Author of Trading In The Zone
- Paul Tudor Jones
- Joel Greenblatt
- Bruce Kovner
- Jack Schwager – Author of the Market Wizard Series
- Linda Raschke
- Peter Lynch
- Victor Sperandeo – Author of Trader Vic: Methods of a Wall Street Master
- Alexander Elder – Author of Trading for a Living: Psychology, Trading Tactics, Money Management
- George Soros