“A trader is the weakest link of any trading system" (Alexander Elder)

After
4 years of winning and losing hundreds of trades and blowing out
several accounts both demo and live, trying different systems,
experimenting with many strategies, I am still unable to achieve my trading goals and become a consistent profitable trader. I wonder why I am taking two-step forward one step backward and one step forward two-step
backward and pretty much in league of majority of traders who are
struggling to make consistent profit day in day out.

I decided to dig deep to find out
reasons for my failure, as such I started reading several books and
interviews of successful professional traders, soon I realized that my
failure lies in my trading approach. I am still thinking & reacting
on emotion, fear & greed like majority of amateur traders and that I need to change the way I think and get rid of this herd 
mentality, otherwise I won’t be able to become profitable
trader, no matter how hard I try.


"If you want to have a better performance than the crowd, you must do things differently from the crowd" (Sir John Templeton)

Professional
traders think different from rest of the crowd majority of the time and
that is why they are consistently profitable over longer period. Lot of
these traders have started with small capital and made big fortunes by
trading consistently year after year. Although their trading style and
system is different from each other, some are technical traders, some
are fundamental traders and some mixture of both.


Patience & Discipline

Amateur
Traders
are not sufficiently selective when entering trades. When they
see volatile price movements, they become impatient and enter trades in middle of nowhere based on
emotion, fear & greed rather than waiting for their system to give a buy/sell signal according to their trade plan. They want to be part of market action, as soon as they open their charts and see volatile price movements. They don't think in terms of probabilities rather they give too much emphasis to an individual
trade. They fear that if they don’t place an order instantly they might lose a
golden opportunity to make money and when they finally place a trade,
majority of the time it’s too late and they fall on trap to professional
traders and enter at a level where these professionals are exiting
their positions and as a result the market retrace and
take out amateur traders stop-loss.  


Professional
Traders
understand importance of patience and discipline in this business. They stick to their trade plan and don’t panic when they see volatile price movements. They understand that there is no place for
emotion, fear & greed in trading. They know their edge and
understand that if they stick to their system and follow
their trade plan they would be profitable in the long run. They know
that price doesn't move up or down in a straight line and that after every
impulsive move there would be a corrective move to entice more
buyers/sellers and they don't need to jump in the middle of a fast moving train. Rather they are looking for an opportunity to buy/sell
at a discounted price (wholesale price) to get a better risk to reward ratio on majority of their trades. They assess their success or failure based on series of trades rather than an individual
trade. They think in terms of  probabilities and fully understand that
there is random distribution between winners and losers. As such they
don't get upset if the miss out on a trade or have couple of losses nor
they get excited after few winners.


Quotes from successful traders
  • The key to trading success is emotional discipline. Making money has nothing to do with intelligence.
  • The big money is made by the
    sitting and the waiting -- not the thinking. Wait until all the factors
    are in your favor before making the trade. (Jesse Livermore)
  • It's not the mathematical skill that's critical to winning, it's the discipline of being able to stick to the system.
  • When you really believe that trading is simply a probability game, concepts like right and wrong or win or lose no longer have the same significance
  • A successful trader is rational, analytical, able to control emotions, practical, and profit oriented. (Monroe Trout)
Risk Management

Amateur Traders don't give much importance to  risk management. Many of amateur traders are under capitalized, as such they use excessive leverage to achieve their goals resulting in taking higher risk than normal. Majority of them don't place their stop loss beyond a technical price barrier, but use some arbitrary stop-loss, which price doesn't respect very often. They give too much emphasis to an individual trade rather than a series of trades. In doing so they use poor risk to reward ratio giving
losses too much rope and taking profits prematurely,
which make current positions more likely to succeed, but deteriorate their risk to reward ratio on long-term performance.  They don't strive for consistent profitability by balancing risk relative to
the accumulated profits or losses. When they are on a losing streak they tend to tremendously increase their bet size to cover earlier losses and they keep on repeating same risk management mistakes until their account is wiped out.

Professional Traders know that risk control is essential part of trading and can make the difference between success and failure. They are fully aware that to be profitable they don't have to win each and every trade. They know that if they are selective enough and use proper risk management they would come out winner in the long run. When they place an order they don't think how much profit they can realize on a particular trade, rather their emphasis is how much potential loss they could suffer on a given trade. Majority of professional traders place their
stop-loss beyond some technical barrier and at a point
that, if reached would indicate that the trade is wrong and it's time to take a loss and wait for the next edge.
They think rationally and just don't
keep moving their stop-loss away hoping that a losing trade
would turn out as winner.
Instead if the market is not reacting as expected they are not afraid to cut their losses much earlier before their stop-loss is hit. When they are on a losing streak they decrease their bet size until they are back in the winning zone. They know that consistency is far more important
than making lots of money. When they are on a winning streak they increase bet size after, and only
after, periods of high profitability. In other words, if they have a
particularly profitable recent period, they may try to pyramid  gains by
placing a larger bet size assuming, of course, the right situation
presents itself. The know that key to building wealth is to preserve capital and wait patiently for the right opportunity to make the extraordinary gains.


Quotes from successful traders
  • Trading is not a business of predicting, it is a business that involves hypothesizing and risk management.
  • Risk management is the most important thing to be well understood.
  • I am no better than the next trader, just quicker at realizing my losses and moving on to the next trade. (George Soros)
  • It's
    not whether you're right or wrong that's important, but how much money
    you make when you're right and how much you lose when you're wrong.
    (George Soros)

To sum up this article, here is my most favorite quote:

“Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money”