As most successful businessmen, including traders, say, the “holy grail” is actually “you.” The trader himself is the solution when it comes to making his business successful. You are the only one who can control your trading game (read about the most common issues traders face). The market itself is irrational and is the outcome of the emotions and thoughts of millions of traders and investors worldwide. Being complex as it is and harsh as it may seem, the market doesn’t care if you had a winning day or not. It just goes on every single day.
Before we delve into the nitty gritty of how to train yourself to be the “holy grail” of your trading business, let’s start with a list of the top traders in the financial market industry. We will then include the different characteristics we can infer from their lives and research from their works.
- Nicholas (Nick) Radge (1967-Present)
Nick Radge, a successful fund manager, trader, and analyst is currently the Director and Head of Training and Research at The Chartist (former Reef Capital Coaching). He formerly worked at Barclays de ZoeteWedd (BZW), HSBC, Macquarie Bank, acknowledging them as mentors in the financial market industry. He started his trading career in 1985 and he is still active at present. An expert in technical analysis and formulating trading systems, he gives back to the financial market industry by being a speaker in many seminars and conventions.
Nick is also the author of many books including Everyday Traders, Adaptive Analysis for Australian Stocks, Unholy Grails, Weekend Trend Trader, Successful Stock Trading: A Guide To Profitability, and Profiting From Dividend Momentum. In his first book, Everyday Traders, Nick identifies the different characteristics of successful traders in Australia. These traders started out with a small capital and a limited knowledge when it comes to trading and investing. Radge identified common characteristics of these traders who managed their way to the top out of almost nothing.
His famous book, Unholy Grails, provides out-of-the-professional-norm strategies that active investors can use in order to achieve long-term gains. These practical strategies can be implemented with minimum effort relative to other trading enthusiasts who burn their hours every single day for the business.
- William (Bill) Eckhardt
William Eckhardt, a professional commodities and futures trader, founded the Eckhardt Trading Company in 1991. Specializing in global commodity futures, this fund manages over 400 milllion dollars. Bill Eckhardt started trading in 1974 after leaving his nearly finished PhD in Mathematics.
Eckhardt specializes in formulating technical trading systems and along with highschool friend Richard Dennis, they created the turtle trading experiment. Being a mathematician, Eckhart specializes in formulating “analytical” trading systems and contrary to most traders, he finds chart patterns and technical indicators unimportant.
He can also be regarded as a science enthusiast with his devotion to producing papers in academic journals. His works include “Probability Theory and the Doomsday Argument,” “A Shooting Room View of Doomsday,” and “Casual Time Asymetry.” He even donated $20 million to the Physical Sciences Division of the University of Chicago and regards it as “an investment in science, in the future, in the understanding of our world.”
- Dr. William A. Dunn
Before embarking in the world of trading, Bill was actively involved in systems analysis studies and operations research for the US government. He had a degree in Engineering Physics and a Theoretical Physics’ Doctor of Philosophy Degree.
He founded DUNN Capital Management in 1974 and is still an active futures investment manager today. Dunn currently foresees a $1 billion fund for his clients and according to research he has a “net” compounded annual return rate of 13.46%.Similar to Eckhardt, Dunn uses objective, systematic, and quantitative methods, most of which are based on statistics. This can be attributed to his degree in Engineering and Physics.Dunn also prides himself in being a trend follower. His system includes trading for a few times a year capitalizing on long-term or major trends.
- Paul Tudor Jones (1954 – Present)
Paul Tudor Jones, the founder of Tudor Investment Corporation studied Economics at the University of Virginia and started trading in 1976. Eli Tullis became his mentor at the New York Cotton Exchange were he traded cotton futures.
His investment corporation is responsible for a variety of assets including currencies, equities, commodity asset classes, fixed income assets, and derivatives. His God-like skills in trading earned him the title of one of Highest Earning Hedge Fund Managers by Forbes Magazine (February, 2013).
In contrary to other hedge fund managers, Paul personally monitors his hedge fund investments. He is known for believing in constant improvement, implying that pride, ego, and overestimation of your abilities can hurt your career.
Being involved in different philanthropic acts, Paul proves that being a wealthy doesn’t equate to having a bad personality. He founded the Robin Hood Foundation, which is dedicated to fighting poverty, providing assistance to disaster victims, and funding efficient organizations in their philanthropic acts.
- George Soros
The self-made billionaire magnate George Soros is the Founder of Soros Fund Management. He studied at the London School of Economics and started his hedge fund in 1969. As of May 2014, Forbes regarded Soros as the 29th richest person in the world.
Soros is considered a legend by most traders. He is called “The Man Who Broke The Bank of England.” This came from his 1992 Black Wednesday trading stint where he shorted $10 billion worth of pounds and profited an astounding $1 billion.
Before he started Soros Fund Management and the Quantum Funds, Soros worked as an arbitrage trader, an analyst, and he also became the Vice President at Arnhold and S. Bleichroeder. He also run different hedge funds such as First Eagle Funds, Double Eagle hedge fund and Quantum Fund. George proves his legendary financial investment skills once again when Soros Fund Management had a 22% return in 2013 and Quantum Fund was regarded as history’s most successful hedge fund generating $40 billion since 1973.
What’s The Common Ground Among These Top Traders?
How Do You Achieve Consistency?
Most successful businessmen focused on one type of business before diversifying into other types of businesses. This applies to trading as well. As you can notice, these successful traders are experts in the financial industry. It is rare to find successful traders who manage different kinds of businesses. You can find them doing sports, recreational activities, and even philanthropic acts, but it is rare to find them doing real estate, telecommunications, and electronics, among others.
How Do You Achieve Focus?
- Persistence and Self-Motivation
This is one of the “top” traits you must harbor in the trading business. As you can see, these successful traders were not made in days, months, or even a year. They started 10, 20, and even 30 years ago and scrambled their way to the top. They burned thousands of hours into crafting their strategy and constantly optimizing them.
Nobody paid them to create their own strategies and build their own hedge funds. They had goals and motivated themselves to achieve these goals. They were earning based on the performance of their funds and these require a great deal of self-motivation and persistence.
How Do You Achieve Self-Motivation and Persistence?
- Hard Work
Successful businessmen, including traders, will never get to the top without “constant” hard work. Most of us want to be the best. Most of us want to earn huge sums of money. But the question is, “Are we willing to take the pain and pay the price to get there?” Nick Radge emphasizes this in most of his seminars. George Soros, William Dunn, Paul Tudor Jones, and every successful trader paid their way to the top through “years” of hard work. There is no such thing as easy money when it comes to the financial industry and you can get wiped out easily if you don’t take the business seriously.
How Do You Work Hard Without Burning Yourself?
Discipline and hard work are twin characteristics of successful businessmen. Successful traders have disciplined themselves into creating and testing their strategies day in, day out. Have you noticed that Tiger Woods started practicing when he was a kid? He didn’t become a professional golfer if he didn’t practice “consistently.” If, for example, he opted to play video games instead of practicing golf, he might not be the “Tiger” we know today. Successful traders discipline themselves into managing their risk, testing their strategies, and constantly improving their strategies.
How Do You Achieve Discipline?
- Thirst For Information
George Soros wouldn’t have been called “The Man Who Broke The Bank of England” if he didn’t look for and confirmed information that would show the weakness of the pound. With his active search, confirmation, and analysis of information, he gained $1 billion dollars on a mere 1992 Black Wednesday. Similarly, Paul Tudor Jones also states that you should have an undying thirst for information because knowing the motivation of the traders around the globe can possibly help you predict the move of the markets.
How Do You Actively Seek Information You Need?
- Strict Followers of Risk Management Principles
Every successful trader knows that even though you are profitable in the long-run, you will still have losing days, losing months, and even losing years. These big shot traders know how to manage their risk in order to achieve returns in the long-term.
Paul Tudor Jones utilizes mental stops (both prices and time stops) and even starts testing his strategies from a low-risk trading size until his strategy is proven to be profitable or not. And he even admits he is a conservative investor who hates losing money. He believes that you should find the best risk: reward opportunities which can turn your trades into maximum profits coupled with minimum downside.
How Do You Create A Profitable Risk Management Strategy?
- Confidence and Optimism
Every successful trader (and even businessmen) gets into the business with confidence and optimism. They go through the journey with both and it never fails them. Setbacks do not let them falter. Once something goes wrong, they go back up and keep moving forward. This is very much evident in the number of years the successful traders have gone through in order to become the cream of the crop. They are confident in their capabilities and their ability for improvement and success that pessimism and non-believers don’t affect their trading game.
How Do You Instill Confidence and Optimism?
- Constant Need For Improvement
William Eckhardt, Nick Radge, and all successful traders emphasize the need for improvement. They do emphasize that you should stick with your strategy that works however, they emphasize that in order to stay in the game, you have to improve or your skills will degrade.
Improvement can be seen in both improvement of your strategies and improvement of your skills. Practicing and experiencing the “real money” trading arena every single day will help you improve your skills in the long run.
This also boils down to consistency in doing the business. If you stop for a year, your trading skills can possibly degrade. Your skills in the business will only improve when you put in “huge amounts” of time and effort into practicing them.
How Do You Improve Your Skills and Your Strategy?
The quantitative part of trading is the one that is teachable. This refers to those things that you can learn from books, seminars and conferences. Entry patterns, trading plan, trailing stops, trading with the trend, risking a little portion of capital, using a stop loss and so forth are the examples of quantitative aspects of trading that you most learn from books and courses that you attend. Most people who want to succeed in trading buy a selection of books on trading and attend very expensive courses or seminars on trading. They do not only attend these expensive courses or seminars once but a couple of times or more yet after attending and completing their courses, they think they feel the need to learn more. Why is this so? It is because what they get to learn is the only quantitative part of trading which does not actually help them achieve what they actually want. They do not feel they have succeeded since months after attending these courses or seminars, they do not think what they have learned really works for them. This only shows that knowing the quantitative part of trading is never enough to become a successful trader.
The qualitative part of trading is the other most important thing that most traders have yet to apply in order to get better results at trading and keep going when the going gets tough. The qualitative aspect of trading involves understanding the flow of trading and anticipating what is going to happen. These are the keys to gaining some sense for a difficult or dangerous situation and being able to prepare for it. Being a successful trader can actually be compared to being a successful driver. Referring to the qualitative part of driving, Michael Schumacher once said, “The most successful drivers are those that understand what’s going on around them.” With his words, he is clearly pointing out the qualitative part of driving. The same is actually true with trading. In spite of attending expensive seminars and courses as well as buying those books on trading, you are not quite making progress in trading because what you are learning over and over again from the books and seminars or courses is only the quantitative aspect of trading and not its qualitative aspect.
Based on the Lake Wobegon Effect, people tend to overestimate their abilities. However, speaking in terms of trading, they tend to underestimate what is required. This means they tend to underestimate the qualitative traits of trading. Knowing the qualitative part of trading is the most important thing that you should focus your attention on so that you become better at trading and eventually succeed at it. If you fail to consider the qualitative part, you will just remain in what is called as the “beginner’s cycle” where you enroll in a course, follow the rules for like 10 trades, you have a few breakevens and a few losses, but you only win a little and then this makes you think it’s not working. Afterwards, you enroll in another course and you experience the same thing where you don’t see any improvement at all.
If you only get to understand clearly and apply the qualitative traits, your chances at succeeding in trading are great. A few of the qualitative traits that people tend to underestimate are the sample significance, risk tolerance, losing streaks and work required. Read on to have an idea of these traits.
- Sample Significance
The problem with most traders is that they tend to rely on very small samples of trades and right away jump into conclusions. They make a decision using very little samples. For instance, they just try to look at a subset of many samples of trades or equity curves, say 12 samples of trades with some losses or even more, and then conclude right away that it is no good. However, you must remember that a very small sample of trades is an insignificant amount to use as a basis for you to determine what happens after a longer period of time. It is actually impossible to judge or determine your success or how well you do it based on 12 trades alone.
Just look at the picture above which illustrates 12 trades from my Daily-F trading strategy. Pretty bad, isn’t it? Well, for me it’s no big deal. 12 trades does not say anything. Actually 12 weeks does not say much either. Now 12 months is something, but still you cannot always judge trading system by last 12 months. Below is the picture of the last 3 years this system has been working. Would you invest into this strategy?
- Losing Streaks
Of course, you do not want to lose trades. You may abhor it, but you have to keep in mind that it is part of trading. It is a function of trading. This means it inevitably occurs. In fact, you can actually calculate the probability of experiencing losing streaks based on a mathematical fact. It is basically based on the winning percentage. For instance, if you use a trading system with a 50% winning percentage over a sample of 50,000 trades, you will probably have a losing streak of 16 successively. Below is the formula for calculating the losing streaks:
PW=Probability of winning
TS =Trade Sample
LN =Natural Logarithm
LS = Losing Streak
Thus, this will help you understand that at some point in trading you will have a losing streak. It might not occur soon but if you stick at it long enough it will probably happen. You do not need to make a lot of profit from trading, but you definitely don’t give up. Although some may dream of gaining incredible returns, but this may come with a great price as they may also lose a great percentage at an instant. Hence, looking for annualized profits of 40 or 30% is already good. It is therefore of great value to take the probability of a losing streak into consideration. Here is a table of the corresponding winning percentages and their probable streaks:
Winning Percentage Probable Streak
By looking at this table, you will learn that if you want to succeed you have to accept that at some stage, there is a possibility of a losing streak and you must be prepared for this particular eventuality. Always keep this table in mind so that you will have an idea what to do to survive in trading and prevent yourself from losing a great deal of your capital lest you return to the beginner’s cycle.
- Risk Tolerance
What comes after a losing streak is your risk tolerance. The 2% rule written in the textbooks is not actually appropriate for all since every individual has his own risk tolerance. Therefore, you have to consider the following facts in order to deal with this eventuality and succeed at trading:
- In terms of trading, there is only one thing that you can control and that is how much you can afford to lose.
- No matter how skillful you are, experiencing a losing streak is expected.
- The 2% rule you read in the textbooks is not always appropriate for everyone.
- The higher your risk, the higher is the volatility rate of your account equity.
Based on the facts mentioned above, first, you should be able to determine from the start how much you are willing to lose as this is the only sure thing in trading that you are capable of controlling. This is actually good for you since you will know exactly up to how much you can lose and you can expect how much you can win.
Second, another fact that you would do well to consider is even though you are good, at some point in time you will have a losing streak. There is a time for losing streaks. This is the reality of trading and you should accept it and be prepared for it.
Third, do not depend on the 2% rule as this may not be suitable for you. You should be aware that you should not reach a level “where the pain is too much.” For some traders, they only put a 2% risk on their account following what they have learned from the textbooks when in fact, this is not what they should be doing as this will give them a wrong idea of reaching their pain threshold. Instead, remember the table about the winning percentages and probable losing streaks, so you do not reach your pain threshold. Understanding this system very well will help you keep going even when you are facing a drawdown.
Last, “the more you risk the more volatile your account will become.” If you are not careful or very particular about how much you are willing to risk, then you will be trading on a rollercoaster ride. However, you can choose to bet 10 or 5% on every trade.
Lake Wobegon Effect
- Estimate the maximum amount of account drawdown you can afford to lose and then divide that into half.
- Trade in such a way that your loss does not cause you any pain.
- Work Required
Most people think successful traders win all the time, but contrary to what they think, successful traders actually have their own losing streaks as well. Take Eckhardt for instance, he has had 25% yearly returns for 20 years and yet he has experienced a losing year. He has had 5 losing months in a row and he is still into trading until now. Most traders are wishing to get 25% annual returns but are not willing to take up the challenges.
Another example of a successful trader is Bill Dunn. He has had several drawdowns up to 60% and 5 losing months as well, but he just kept going. Why is that so? It has something do with his confidence. This confidence is based on his positive expectancy. He believes in his positive expectancy and thinks in such a way that he will only fail if he doesn’t go on with the next trade. He does not mind about his returns but he is just confident in the positive expectancy he can make by following trends. What makes these successful traders stand out among the rest is their persistence.
Other Facts About Trading:
- You can’t expect your equity curve to rise day in and day out.
- Down and flat periods will inevitably occur no matter how skillful you are.
Always remember the equity curve can’t go up linear and that is the “fact of life.”There will be bad periods, down periods and flat periods. This is the reality of trading and you must be able to get through this.
Lessons to Live By:
- Focus on the next 1000 trades.
- Do not think of trading “in terms of monetary value” but think of it as a “process.”
- Detach yourself from the “trading environment.”
- Don’t attempt to force the account, instead allow it to flow.
If you want to be successful at trading, there are certain lessons to live by. Apply the mental attitude of moving on to the “next 1000 trades.” This will help you get through every drawdown, reminding you that every single trade should not matter. Another thing is you should consider trading as a “process” and as much as possible avoid putting too much emphasis on the monetary value of trading. The societies of today are wired to get the money and search for instant solutions without even willing to do the work. After placing the trade, let it do the work for you. You can do this by “thinking of trading as a process of creating a positive expectancy.” Creating a positive expectancy actually means cutting your losses and letting your profit run.
What have you learned from these geniuses of trading? Are you going to apply more hard work and education and effort to your trading business. Put your thoughts below and discuss what you think it will take for you to get from where you are right now to where you want to be in five and ten years.