2 Proven Ways To Think Like A Successful Stock Trader
Highlights of the article:
- Good trading systems often have low payout rates.
- A profitable strategy in particular only wins about a third of the time.
- Many traders give up after a few losses so they don’t make any money.
Ted Williams had a batting average of 0.406 in 1941.
That was 78 years ago. Since then, no major league baseball player has averaged over 0.400.
An average of 0.400 means the batter is hitting 4 out of 10 pitches.
For a batter, it’s as good as it gets. No one has achieved this level of success in nearly 80 years.
On the other hand, an average of 0.400 means the batter fails 6 out of 10 times.
Successful hitters think differently than many of us. We often try to be successful 10 out of 10 times.
A baseball player knows that it is impossible to be perfect. Do you?
Big stock traders think like .400 hitters
Years ago I learned that large traders often aim for an average of 0.400.
A friend of mine was a floor merchant. He told me he would be nervous if he was right up to 40% of the time.
Before computers, ground traders were market makers. This means that they sold when you bought and bought when you sold.
So, as stocks plunged in October 1987, ground traders bought. They bought everything at the bottom and sold everything at the top.
My friend said he was often scared, but he knew that in the long run he would make a lot of money.
This old trader told me he made the most money when he was right about 38% of the time.
If he was right more than 40% of the time, he wasn’t taking enough risks. A win rate of less than 35% meant he was taking too much risk.
In other words, every day he took the subway to the New York Stock Exchange, hoping he was wrong more than 60% of the time.
Remember the goal is to earn money
Good trading systems often have low payout rates.
The chart below shows three trades in a simple moving average system. Two were losers.
Simple trading strategy – July 2019 to September 2019
Sell ââsignals are marked in red. Green arrows indicate purchases.
This strategy avoided the big drop in August. Two small losses followed. The last buy signal shows a big gain.
For many traders, it is difficult to see two consecutive losses. But it is typical. This strategy only wins about a third of the time.
It is profitable in the long run as some trades show big gains.
But many traders give up after a few losses. They would rather be right than earn money.
This is the first key to successful trading: Decide whether it is more important to be right or to make money.
You should focus on the total earnings of your portfolio rather than on an individual transaction.
Another key to success in any business is controlling costs.
For stock traders, the costs include commissions.
The graph below shows that commissions reduce your profits. This bite might be bigger than you think.
Now, of course, costs aren’t the only factor to consider when selecting a broker. But low cost brokers allow you to keep more of your earnings.
If you are looking for a broker, the list above provides details of the different options trading companies to look for. From interactive brokers to Fidelity and more, feel free to use any broker you like.
Or if you’re a visual trader, check out the Tasty Platform.
We have a paid marketing relationship with them, but we’ve received great feedback.
Some brokers are better at certain things than others. And keep in mind that it’s not uncommon for people to use more than one to meet their needs. Always remember to do your due diligence.
These are just two of the keys to success, but they could be the most important.
First of all, focus on the money instead of being right. Second, remember that the costs are significant.
Michael Carr, CMT, CFTe
Editor, Trade at maximum speed
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