Mindset of a Successful Trader

Since Joining the team at Elliot Wave Trader I haven’t posted much. I’ve had my head deep in analysis and getting the crypto service up and running. I wanted to write a post on being successful at trading. I see a lot of interest in crypto trading and hearing more and more about inexperienced traders trying their hand. Here I try to share what the key mindsets and behaviors that are needed to be successful and not get taken out. My opinion. I am consistently profitable at trading nd pull regular income from the markets… trading equities, futures, options, and now cryptos. Beyond continuing to trade, my work now is to share.

Have a Healthy Sense of Fear

Before you endeavor to trade, you have to consider the market dangerous. When I was a young industrial designer I had to fabricate my own models using wood and metal working equipment. For a while I worked in a plastic fabrication to develop better skills since I didn’t have a father at home to teach me how to work with my hands. My boss was training on the table saw and he told me to fear it but not so much to become unsteady. The same is with the market. You actually have to think of the market as trying to make you go broke. If you don’t it will. But at the same time you must not fear it so much that you don’t make fast objective decisions. ‘Healthy fear’ is a balanced approach.

Be a Contrarian, Understand Sentiment

In my line of work my text message boxes are filled with news from friends. One might say, ‘heard a rumor that so and so will happen….must buy’. Or, ‘heard a big holder is selling’. I promise each of them trading news will cause you to fail. Most often news is priced in early. When I was a young day trader I used to buy and sell earnings rumors. It didn’t take long to bust my account. I soon learned that the rumor was already reflected in price and if you didn’t catch it in the price structure early, you were left out of the trade.

Further, one must understand how price structure affects sentiment. Big corrections knock people out of the trade. It is like getting your armed twisted to the point of calling mercy. Deep corrections eventually cause everyone but the most stubborn to sell. That money is eventually brought back into the market during a rally to provide fuel for the upswing. Those that were knocked out are forced to buy in higher. Rinse. Repeat.

To successfully trade sentiment you have to learn to smell greed and fear. Buy when everyone is running, sell when everyone is piling in. When I was at Hewlett Packard, I was fortunate to put my entire 401K into cash at the top of the financial crisis and housing bubble. Per the movie The Big Short, the greed was rampant. I smelled it. Eventually, we had layoffs pending at Hewlett Packard and one day I heard that the banks were not giving HP letters of credit to get product on the ship from Asia. Further, I saw that the market sell off was reaching crescendo levels in volume. Fear was palpable. I put my entire 401K back into a few growth funds and it doubled over about nine months.

I use the Elliot Wave Principle in all my trading now. The entire system is designed for measuring sentiment. We put mathematical targets on wave structures, that at the core, are measuring sentiment. The system tracks a five wave structure that all markets have with three waves that move forward: 1,3, and 5 and 2 that correct: 4 and 5. Deep wave two’s are the wash outs. They knock people out with fear, the metaphorical arm twist and call for mercy. Wave three is what we trade for. Right after the washout the biggest fastest, longest wave where most of the return is made. Fours are small and knock out a few. Fives are the greed waves and the top. They are short before the next big drop. All have a mathematical structure which we teach on Elliot Wave Trader, so we can target our entries, profit taking, as well as our stop losses.

Develop a System, Before you Fly by the Seat of Your Pants.

If you don’t have an objective set of rules, you will never be able to make objective decisions. Relying on intuition is a big mistake when starting out. Intuition that is useful is born of experience only. There are many systems that work. Elliot Wave and a few technical indicators systems, some of which I’ve created, are what I use. They give me objective decisions. Sometimes my intuition may give a little more room to a trade based on price action, but in the end of the day every trade has a hard stop and a target where take profit.

As I always say, If you don’t have a stop and a trade, your only plan is to go broke. As I always say, If you don’t have a stop and a trade, your only plan is to go broke.

When in design school we were taught the grid, a system for laying out pages and typography so your designs were beautiful and harmonious. But that alone didn’t create original designs. You had to learn to wander from the grid beautifully yet still imply that structure underneath. The same is true with trading. Create a system. Then build intuition. Both are needed.

Developing a system will not get success if it doesn’t work. You have to actually put it to the test over time or back test in past markets. Markets repeat history, but conditions are cyclical. If the system wasn’t successful in the past, it will not be in the future.

Stop Trying to Be Right

The market wants to make you broke and it certainly doesn’t want to prove you right. There are two natural human tendencies that lead to folly in the market. One is the desire to want to feel good about our decisions. The other is competitive, particularly when someone disagrees with you. Stop trying to be either right or better than anyone. The market is truth and will leave you no doubt in your profit and loss statement.

Along these lines, I suggest keeping your positions and returns private, especially as a new trader. Sharing constantly what you are doing causes the temptation to brag about wins, not talk about losses, or argue about what is right. We all like to look good. Only look at your own returns and judge them objectively. Making money? Or not? If not, you better admit you need to change something, because going broke comes next.

My trade calls are up on Elliot Wave trader for all to see. We have trade tables that serve to keep me accountable but also are there to follow along. They are not deemed personal recommendations for anyone but expressing where I am entering and exiting the market. People can follow at their own choice. I have a positive return overall, but I have plenty of bad trades. But they are the cost of doing business. I am not always right. But I am running a marathon, not a sprint. Only if I can slowly eek out a return in the markets I trade, will I stay in the business. I don’t care if anyone agrees with my calls or not. It isn’t relevant.

Start Small

Finally if you want to start trading, start small. I openly tell new people to my service to only start with $500 to see if you get a feel. My service costs $99.99 a month so although we often get a 20% return month, it is perhaps too small to pay for the service. But what I care about first is whether someone avoids going broke following me. Hearing otherwise would be personally painful. Crypto trading is very volatile and preserving capital should be the first goal. Then we can move on to building a rich return.

Making lots of small trades also increases the likelihood that you make good decisions. If you put $10,000 in a trade you are far more likely to want to win that trade than a $500 trade. That emotion will create poor decision making over time. After you have a track record of making a return over time, you can size up a bit. But the best traders I know have a lot of cash on hand. Some of that is to secure their emotions, and some of that cash is to make use of opportunities the market suddenly gives in a washout correction.

I personally keep about 20-30% cash in my equity, futures and options accounts. And, very little of my money over all is in crypto trading although it supplies most of my return. This risk management level is something I’ve learned makes me successful.

I advise learning the Kelly Criterion. The formulas are readily available online. The formula is used to calculate your bet size to maximize return based on your current performance. It was designed for gambling but has been modified for investing. It isn’t helpful when starting out but if you track your performance over the long term, using it will help speed your return. I can’t give a big treatise here but it is easy to find.

Trade safe so you can trade again!!

Ryan Wilday is a trader and analyst at Elliot Wave Trader where he runs the crypto currency trading service. The subscription service was started in August 2017 and provides trade setups model portfolios along with rich discussion and guidance.