I met Joe Fahmy a few years ago at Lindzenpalooza. He has a great way of communicating his trading skills to a novice to intermediate traders based on his 16 years of trading. Fahmy has guided his hedge fund to outperformance over the past 13 quarters. As previously mentioned, I wanted to present something less technical and chart focused;

This is our second attempt at bite size, easy to understand, bullet points for traders. The first post is here.

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1) Loss cutting:  Trading has this amazing historical footnote: If you study the great traders throughout history, they all share the same statement as their number one rule: CUT YOUR LOSSES! Capital preservation “keeps you in the game.” It is especially important once you understand the math: a 25% drawdown requires a 33% gain to get to break even; Down 33% means you need to rally 50% to get back to square one; As we saw in 2008-08, a -50% loss requires a +100% gain to get back to even. In sports “Defense Wins Championships.” The same goes for stock trading. Most traders need to focus more on defense.

Even Warren Buffett understand the traders credo: “The first rule of investing is don’t lose money. The second rule is don’t forget Rule No. 1.

2) Confidence: There is nothing worse than seeing a great opportunity but not having the courage to “pull the trigger” and execute the trade. Freezing up due to fear does NOT happen to great traders. These thoughts don’t even enter their mind because they are confident in their plan. They know wht they will do if the trade goes their way, and perhaps more importantly, they know what to do if it goes against them. Confidence cannot be taught. It comes from making decisions, taking action, and learning from experience.

3) No ego:  Successful traders may have big personalities, but they separate their ego from their trading. They might have serious conviction behind their positions, but when the market proves them wrong, they don’t argue with it. They simply move on and accept it.

Two things I never argue with: the stock market and women. Both of them are smarter than me, and both are always right! (BR: Spoken like a married man)

4) Consistency: The best at anything are the best because they are consistent. Michael Jordan isn’t considered the best basketball player ever because he scored 30 points ONCE in a game. It’s because he averaged 30 points per game over his ENTIRE career.

Traders should not obsess with their day-to-day profit & loss. Rather, they should shoot for consistent positive months, quarters, and years with minimal draw downs. You do not want to be the “boom and bust” trader who does well in a strong market but gives it back during market corrections. These guys are a dime a dozen and typically get blown out of the market at key pivot points (Last cycle, I knew a few who became mortgage brokers — how is that for timing?)

5) Students of the market: Successful traders NEVER get complacent. They are always eager to learn, constantly looking to improve their skills.

One way to improve is through post analysis of your trades. It is important to look at your numbers and make sure your losses are smaller than your gains.

For technical traders, studying your entry points and looking at charts that worked (and didn’t work) is part of the constant learning experience of becoming a confident and consistently profitable trader.

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Fahmy holds seminars for active traders who want to improve their returns.   Readers of the Big Picture who are interested will get a $500 discount on the full day event. Go to TradingBigWinners.com and enter the promotional code: “bigpicture500” for the New York (3/3) seminars. I will be discussing trader psychology and cognitive errors at this seminar.

Category: Apprenticed Investor, Rules, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “5 Qualities of All Great Traders”

  1. louis says:

    Rule # 6 – Even if you get the first 5 , some new financial product will blow up and you will lose all your savings.

  2. ssc says:

    Hmmm, how does one do the first Buffet investment law (“don’t lose money”) and at the same time “cut one’s loss??”

    Really, instead of a loser mentality of “loss cutting”, the important rule is really “know when to sell”, which covers both win or loss. I think what made Mark Cuban well known is not just because he’s a loud mouth, but he knows when to cash in.

    ~~~

    BR: The trader’s interpretation is do not have huge losses. Small losses are part of trading, and are considered a cost.

  3. parsec says:

    Also, don’t forget to charge commissions rather than pay them. Over time the actual trading part of your endeavor is likely to break even, so a constant supplement will aid in the illusion of your genius. Best of all, don’t start out as a pauper. A wise choice of parents is always the best business strategy.

  4. bear_in_mind says:

    Thanks for sharing, Barry.

    Discussions on “investing” seem so focused on making money NOW, but I’m really concerned with making money over the next 15-20-25 years. As a result, I feel like I’m out of step with so much the trader’s chatter. So if I have a request, it’s to work toward more clearly defining trading ideas from investing ideas.

    If the market is going to collapse 40-50 percent, that’s obviously germane to both paradigms. But if’s the suggestion relates to an anticipated 8 to 12 week move, I don’t know how helpful that is for the portfolios of the majority of investors.

  5. illoguy says:

    I’m surprised at the cynicism of some of the comments. It’s something that can be learned. I’m no trading genius, but grateful for the lessons learned and find it liberating knowing markets can be navigated to varying degrees of success if you’re willing to put in the effort.

  6. ichbinnichteinnummer says:

    1a) Cut my losses…
    1b) Let my winners run..

    2) Relax..

  7. bear_in_mind says:

    For your consideration…

    Media Headlines Will Lead You To Ruin
    By Lance Roberts of Streettalk Live
    February 21, 2012
    http://advisorperspectives.com/dshort/guest/Lance-Roberts-120221-Media-Headlines.php

  8. mathman says:

    The Quote of the day illustrates how J. K. G., in trying to be somewhat zen-like, completely misses the mark.
    Anyone going to a supermarket is totally surrounded, confronted, targeted and trapped by marketing strategies like: ADVERTISING, pricing, shelf-placement, ambiance, lighting, aromas, presentation of product, etc. One is decidedly NOT in touch with one’s “deepest emotions.” The whole idea is to get you to buy stuff on impulse (besides the stuff you think you need – like cheesy poofs).

  9. Expat says:

    Hi Barry, I shot this list straight out to my students (with acknowledgements, of course). It says pretty much the same thing as the others and my students keep asking me why I give them the same advice over and over. I explain it’s because they don’t follow the advice and because it is so damn important.

    I don’t believe you can teach just anyone to be a great trader or even a good one, but you can teach people to not be bad traders, which is a pretty good start.

    When I started teaching I reflected on the advice, good and bad, I received as a trader. Most traders told me that any idiot can get into a position but only good traders know when to cut losses. Second to that was rule #2.

    Another trader with a humanistic and philosophical bent told me once that what he loved about traders was their incessant curiosity, which is reflected in rule #5.

    Ego and consistency are the bugbears of young (and not so young) traders. As Taleb pointed out, what we consider great traders are possibly just statistical survivors.

  10. mathdude,

    at least, recognize that the “QOTD”‘s ‘roll-over’ (are not ‘static’)..
    ~~

    A person buying ordinary products in a supermarket is in touch with his deepest emotions.

    -John Kenneth Galbraith

    ~~
    but, past that, with..”…One is decidedly NOT in touch with one’s “deepest emotions.”…”

    how can you be so sure?

    maybe, a ‘spin’ through..

    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus-ns-aaf&v%3Aproject=clusty&query=von+Mises+Economics+is+Subjective+Economic+Calculation
    or..
    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus-ns-aaf&v%3Aproject=clusty&query=Taleb+Ego+Uncertainty+unchecked+Hubris

    would ‘help out’..~

  11. jaytrader says:

    These are all self evident traits.
    Of course its loss cutting and letting your winners run and proper asset mix/selection. Of course you have to put time into it. Of course its about consistancy…

    From my roughly 15 years trading derivatives and MBS on Wall Street, I believe the following is paramount to succeeding in any trading environment:

    1-NOW WHEN YOU ARE WRONG.
    2-HOW QUICKLY YOU GET IT RIGHT.

    Master these two traits and you will always be in the winners circle.

  12. SivBum says:

    Are they in descending importance? Where is luck comes in?

  13. Bill Wilson says:

    It seems to me that “loss cutting” and “no ego” go hand in hand. I try to enter every trade with the understanding that I’m possibly, if not probably, wrong. So, I decide where I will take my losses before I buy.

    Right now, I think the S&P will pull back 3-5%. If the S&P crosses the 10 day moving average, I plan to buy put options. If the S&P recaptures the 10 day moving average, I’ll take my losses and consider myself proven wrong.

  14. [...] Fahmy, een succesvolle hefboomfondsbeheerder, zet op de blog The Big Picture vijf talenten op een rijtje die alle succesvolle traders gemeenschappelijk [...]

  15. [...] Presented without comment… 5 Qualities of All Great Traders [...]

  16. [...] This is our their attempt at creating bite size, easy to understand, bullet points for traders. The prior posts are here and here. [...]