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Habits of Highly Successful Traders, Part 2

Continued from Part 1. Trading is different than investing. Simply put, trading is short-term, investing long-term. 

The goal of investing is to gradually build wealth over an extended period of time through the buying and holding (and selling at a appropriate time) of a portfolio of stocks, ETFs, bonds, and other investment instruments.

Trading involves more frequent transactions, such as the buying and selling of stocks, commodities, currency pairs, or other instruments. The goal is to generate returns that outperform buy-and-hold investing. While investors may be content with annual returns of 10 percent to 15 percent, traders might seek a 10 percent return each month. 

Trading is hard work. Don't let anyone fool you. But if you're interested in this, it can be rewarding. However, you must have discipline and be able to follow rules. Most traders blow up their accounts. But the good ones follow certain habits. These habits can work well for investors also.

7. They are willing to change sides if the market tells them to do so. Take the last several days for example. My broker says hang on. But I've been mostly in cash the last 30 days anyway. If Warren Buffett has record cash holdings, he must know something. The market was telling me that I should be careful. So I did what it told me. I put aggressive stops on my stock holdings and watch them go to cash. I'm happy. Don't say: "I think the market will do this today." Instead, wait to see what the market does.

8. They trade aggressively when trading well and modestly when they are not. Sometimes when I have a couple of bad trades, I step back to evaluate. I don't push it further. The best traders know when not to trade. 

9. They realize the market will be open again tomorrow. I miss trade opportunities all the time, but never look back. 

10. They never add to a losing trade. EVER. Never trade down. Better to cut losses than add to them. Trends a very strong. If a stock starts to trend lower, sell it. Don't add to the position. Never lose more than 5 to 7 percent on a stock, or 1 percent on a futures position. 

11. They never force trades based on a daily goal. Say you have a daily goal of $1,000. Trying to meet this goal can force you to trade badly. Instead, your daily goal should be "did I follow my plan, did I follow my rules?" If you do this, the cash will follow.

12. They read a lot. And they read books about market psychology, not just how to invest or trade. For example, The Wisdom of Crowds, by James Surowiecki; The Art of Strategy, by Avinash Dixie; and Markets, Mobs & Mayhem, but Robert Menschel.

13. Their position size is calculated exactly on risk tolerance. Decide beforehand what your maximum risk will be on a trade. Say it's $300 (never risk more than 2% of your account on any one trade; this can be higher for long-term investing, say 5% to 7%). If you buy a stock at $50, then if you place your stop at $48, your position size should be: maximum loss / stop position, or 300 / 2 = 150 shares. You could buy more shares with a $49 stop loss, but the risk of shake out increases. Conversely, you could by few shares with a wider stop loss. Decide this before you buy. 

14. They write down or record every trade: price, entry and exit points, thoughts, etc. Keep a journal. 

15. A winning trade does not results in taking on extra risk on the next trade. Remember, follow your plan, stock to your rules, be consistent. 

And have some fun. 

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