Why Some Stock Market Traders Win, And Many Don't

Let's start with a disclaimer - excessive trading really is more to do with speculation than anything else. With excessive trading, the chances of incurring losses or even wiping out your capital may not justify the potential gains that you may stand to make. And yet, as the book "Stock Market Wizards" (Jack Schwager's impressive account of trading geniuses) would suggest, there are in fact traders who make money from trading on an ongoing basis. The million dollar question is; what makes these traders successful?

Rahul Jain, Head - Retail Advisory, Edelweiss Broking Ltd believes that 'trading' and 'investing' require completely different mindsets; yet it just so happens that many individuals enter the markets with the desire to invest for the long term but end up trading excessively instead. "Trading requires an understanding of how stocks and indices move; which means, a trader may buy or sell a particular stock based on parameters that are unlikely to affect the company's performance over the long term. Investing, on the other hand, requires identification of companies which can do well over a long period of time. Investing requires patience, conviction and a passive yet a review based approach towards markets", says Jain.

If you must start off on the journey towards being a trader, it might be worthwhile to know what makes the handful of winning traders tick. Here are a few habits that have set some successful traders apart in the past.

Give it Time
Most people imagine successful traders to be a swashbuckling bunch, rushing headlong into the markets at a moment's notice and aiming to get out in a few minutes having made a killing. This is quite far from the truth. Most successful traders have taken years to perfect their trading strategies, with many of them losing capital or even going thousands of dollars into debt in the process. In other words, they've paid to perfect their art in terms of both capital and time. Lesson: If you want to be a successful trader, you've got to be willing to invest time into perfecting the art.

Have a Trading Plan
The last thing successful traders do is trade outside their plan, let alone trade without one. Traders who create wealth usually do so by "planning their trades, and trading their plans". An optimal plan usually includes things like entry signals, exit signals, stop losses and the universe of securities to trade. This plan isn't vague, but very clearly written down. You'll be surprised to know the fierce levels of discipline that most successful traders display when it comes to adhering to their plans. Perhaps it's a natural outcome of burning ones fingers many times over. Apart from a plan, famous traders are also known to maintain a log of trades made, along with remarks and lessons learned. Lesson: be meticulous with your trading plan.

Jain of Edelweiss believes that trading without a plan makes traders more susceptible to common trading mistakes. "A trading plan defines what is supposed to be done, why, when, and how. It covers the trader's personality, personal expectations, risk management rules, and trading system. An effective trading plan details the steps that a trader must follow when entering and exiting trades", he says.

Master the art of trading one, rather than dabbling in many
It appears that most successful traders have mastered the art of trading just one security (or a narrow set of securities). Examples include the Nifty, the Bank Nifty or even commodities such as sugar or gold. There's a reason behind this - trading is as much a 'science' as it is an 'art', as no security every really moves in a 100% predictable fashion. Over years and years of trading the same security, the successful trader gains an intangible feel of which direction it's headed and this contributes to their performance. Lesson: When it comes to trading, don't aim to be a jack of all trades

Maintain your stop losses
A stop loss is a price, above or below which you'll exit the trade come what may (depending on whether you're long or short). World class traders are sticklers when it comes to stop losses. Even if they have to book losses multiple times in a few sessions, they'll do so if their plan recommends it.

Jain believes that a disciplined approach to maintaining stop losses is a key element of trading success. "Either greed for more profits or fears of losses stop novice traders from adopting a logical exit strategy. That's why it is said that as a short term trader you should live to trade another day. What this means is appropriate risk management tools are most important for survival of a trader", he advises. Lesson: Above all else, be disciplined with your stop losses.

Widen your trading time frame
As a thumb rule: the shorter the trading timeframe, the higher the risk. Day Traders or 'scalpers' face the maximum chance of capital erosion and the highest trading costs as well. For best results, you might want to consider bring a 'positional' or 'swing' trader who holds on to a position for at least a few days to a few weeks at a time. Lesson: trade in timeframes that are more predictable than the next few minutes or hours.

A final word of advice from Jain is to take time to assess whether or not you're cut out to be a trader in the first place. "The choice between investing and trading should depend not on what one would like to do, but on what kind of skill set and temperament one has", he says in conclusion.