Five habits of successful traders

Those who win consistently in the financial markets share a number of traits.
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The first thing that sets successful traders apart from the rest is that they treat trading as a business, not a hobby.

“Successful traders are very systematic in the way they go about it. They are not emotionally invested in any particular trade, and that allows them to exit a losing trade without feeling that they have been jilted by a lover,” says Shaun Murison, senior market analyst at IG.

“Unsuccessful traders are emotionally invested in trading. When a trade goes against them, they take it personally and feel they have to hang on in the vain hope that the trend will reverse in their favour.”

Economist John Maynard Keynes once remarked that “the markets can remain irrational longer than you can remain solvent”.

Keynes observed that financial markets could appear irrationally priced for years before the inevitable correction. Traders who bet against the trend – however irrational that trend may appear – are more likely to suffer losses than wins.

Moneyweb asked Murison for five habits of successful traders, and what distinguishes them from the unsuccessful. He shares his thoughts here.

1. Treat your trading as a business – not a hobby

This means you need to formulate a business plan, or what we more accurately call a trading plan. You need to develop a roadmap, with goals. What do you plan to do with the proceeds of your trading endeavours? Retire early? Buy a house at the coast? Travel abroad every year? Buy a yacht and go sailing? What kind of returns are required to achieve these goals?

Part of this business plan is understanding that there will be good times and bad times.

A trading plan can look something like this:

  • Which markets will I trade? It helps to focus on just a few, such as forex pair like EUR/USD or an index like the Nasdaq or South Africa Top 40.
  • What is a feasible expectation for returns? 10% to 15% a year is pretty conservative and certainly beats inflation.
  • How much of my account will I risk in any one trade? Suggestion: no more than 5%.
  • How much of my account will I risk in total? This is when you have multiple trades open, so the suggestion is to keep your total capital at risk to less than 15% to 20%.
  • How will I identify entry and exit criteria? This falls under strategy: go to IG Academy to learn how to analyse and trade the markets. Get a system that works for you, and don’t treat this like a casino. Stick to your entry and exit criteria.
  • How much time will I allocate to studying and trading the markets? Suggestion: make some time available daily, but don’t let it be all-consuming.

Review your plan, make sure you follow your plan, and improve on it as you gain more experience.

2. Manage your risk

This is so important that whole books have been written on the topic.

What this means is you must determine how much capital you will put at risk in any one trade. Make sure it’s a feasible amount relative to account size.

For example: 1% to 5% of account size is considered low to medium risk. Anything more is considered high risk. Bear in mind, if you lose 50% of your account, you need to make 100% to get back to even.

Trading tools like automated stop loss and trailing stop loss can help with this.

Having an understanding of volatility can help in managing risk. High volatility suggests you should take smaller positions in the market, with wider stops. In times of low volatility, you can afford to take larger position sizes with tighter stops.

An indicator like average true range (ATR) can help determine how much a market is likely to move in a day between low and high, which is another measure of volatility. ATR can also help in placing stops and taking profit levels.

3. Discipline

Knowing what to do is not as difficult as enforcing what you do. Emotion can often dictate behaviour when you are in the trade.

Decisions around when to get in and out (whether favourable or unfavourable) need to be made before you get into the trade. This is when we are more inclined to be rational.

When you are in the trade you need to be able to identify when emotions such as greed and fear are leading you astray. If you have problems executing a stop-loss when a trade is going against you, work around it by automating this part of the process using the trading platform.

4. Overtrading and overexposing

Your position size in trading is key. Positions that are too large can equate to gambling. Understand how leverage works for the instruments you are trading (in other words, how much your profits or losses are being magnified in the market). Look at how much exposure you have in the market relative to your account size.

5. Don’t trade just for the sake of it

Wait for an opportunity to present itself in the market rather than forcing the issue.

If you open your computer and just find a reason to press buy or sell you are probably overtrading.

If you are looking to ride a major trend, you should be prepared to wait days or even weeks for the right trade set-up. Patience works wonderfully in the markets.

About IG

IG Markets South Africa was established in 2010 and is regulated by the Financial Sector Conduct Authority (in South Africa) as an over-the-counter derivative provider and an authorised financial services provider (FSP No 41393). It has an office in Sandton to service its thousands of South African clients. Its board and senior management in South Africa consist of largely South Africans, making it a truly South African operation. As one of the biggest employers in the online broking category, it is proud to be playing a leading role in the growing financial services industry in South Africa.

Note that CFD losses can exceed your deposits.

IG Markets is part of the LSE-listed IG Group, which has a market cap of £3.4 billion (R71.4 billion). It has more than 313 000 active clients worldwide.

You can access IG Markets at https://www.ig.com/za

Brought to you by IG Markets.

Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.

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