Most traders that are profitable over the long term possess a distinct set of trading skills that separate them from the majority of traders that do not make money. Consistent success is a result of a systematic process that possesses an edge over the competition.
Here are 10 trading skills that I have seen in common with successful traders I have either studied, known, or watched in action. These skills that had to be mastered before I was able to generate and keep long term profits from trading options and in the stock market.
System Development: Traders must have the skill to create a trading system with an edge that uses entry and exit signals of repeating price action patterns for a high probability of long term profitability.
Risk/Reward Ratio Management: Profitable traders know how to create good risk/reward ratios with their margin of safety with their entry signal, their stop loss placement, and managing the potential open ended upside profits with a trailing stop and using a profit target to lock in profits while they are still their. Good traders also understand that their risk/reward ratio is always evolving and changing as the trade plays out.
Backtesting: Doing historical chart studies and backtesting signals is a skill to understand what worked in the past. This gives better odds of success in the present and future. While a good backtest doesn’t guarantee future success a bad test almost guarantees what doesn’t work.
Trading in the path of least resistance: Profitable traders are not tempted to fight trends. They go with the flow until that stops making them money. The odds are that price action continues to go in the direction of the current momentum and trend until that move is technically broken.
Cutting Losses Short: The ability to accept an unprofitable trade is wrong early in the loss is a skill. The primary reason most traders don’t make money is that they allow their losses to grow too big. Profitable traders limit the size of their losses, they know when they are getting out before they get in.
Trade Like a Business: Manage your trading like a business for making money not a hobby. For serious traders their positions are not a form of entertainment and excitement for them, it is a career.
Letting Winners Run: The flexibility to let a winning trade run when there is no reason to exit it early is a skill. A profitable trader must have the ability to have little tolerance for losing trades but have patience for a winning trade that keeps growing. The ability to manage stress and uncertainty and resist the desire to lock in quick profits is a crucial skill as the big wins are needed to pay for all the small losses.
Tune Out the Noise: Possessing the skill to navigate the random nature of price action and focus on your system’s signals that are valid is crucial for not getting lost in the markets noise or your own emotions and ego.
Confidence: Profitable traders have developed an unbreakable faith in their trading system and their own ability to execute it with discipline over the long term. The best way to manage trading stress is with confidence in your own strategy and your discipline to execute it consistently.
Focus on what is happening not what you think is going to happen. Profitable traders have the skill to accept the unknown and that the future is unknowable so they trade what is currently happening. Managing uncertainty is a primary skill for a trader, they may not know the future but they do know what they are going to do based on different price action scenarios.
If a trader masters all ten of these skills it is very difficult not to become profitable.