by Ken Long

At a recent weekend traders roundtable discussion, the topic of the keys to trading success came up.

Experienced traders with different styles and different favorite markets and techniques identified what they thought were their best pieces of advice for novice traders.

It was late in the day and adult beverages may have been served and so our creativity was perhaps in full force.

What finally emerged from our freewheeling discussion was the idea of the 8 "P's" of trading success.

After we discussed each of these concepts, our insight was that your trading results were probably shaped by the concept you were least effective with. At least, that is our working idea. Here are the eight keys that we identified: 

1. persistence: there have been a lot of studies that suggest the most important component of success is grit. You've heard the saying that showing up is 90% of the battle. Trading is so complex and uncertain that persistence is crucial. It's the willpower to keep going in the face of obstacles.

2. preparation: there's no substitute for having a detailed trading plan to help guide you through complexity.

3. participation: you can't make money in the market by being on the sidelines.

4. practice: repetition breeds muscle memory and for traders, mental memory.

5. performance: trading is a bottom-line business and at the end of the day, month, year you have to make money.

6. perception: this ranges from how you perceive the market, how you perceive a system working, and how you perceive yourself.

7. position sizing: this ensures that you stay in the game even when you get the direction wrong. Position sizing allows you to achieve your financial objectives.

8. preservation: you have to take care of yourself, your family, your capital, your sanity, your sense of humor, and your profound sense of self.

The First P of Successful Trading is Persistence

In our recent trader’s roundtable discussion on the keys to trading success, we began with the idea of persistence. We all agreed that it was an essential element of trading success. Even when you are part of a trading mastermind, at the end of the day only you can make the decision to pull the trigger to make the trade. Only you are there to gather the results, good or bad and apply them to your own bottom-line.

Persistence is all about grit and determination. It is about pushing on through the obstacles that life and trading set in your way. It has everything to do with pursuit of your goals and dreams and it takes into account a realistic appraisal of just how difficult this profession is.

Everything in life that is worth achieving has a price that must be paid. In trading, part of that price is having to endure losing streaks, second-guessing, bad fills, power outages, unfortunate timing, making the right decision for the right reason and watching the trade continue on to extraordinary profits without you. All of these events can suck the life out of you and make your experience bitter and tiresome.

I am reminded of every road march I ever made with a heavy pack, early in the morning or late at night, in the heat and in the cold. Every step was painful and even a career of experience didn't make the next one any easier to take. But that was the price we paid for being elite infantry. There are no shortcuts and part of your strength in the crucial moment comes from the accumulation of the tiny victories you earned along the way.

So one of the things you have to look for as you master the trading craft, are the little nuggets of satisfaction and accomplishment that you find from trading professionally, in doing the right thing, in the quiet of your own office, with no one around to see it. These little satisfactions accumulate and give you the energy that it takes to get through the tough times. So be on the lookout for the little victories, you'll need them later.

When it starts getting tough, remember that 90% of success is showing up, and answering the bell.

The Second "P" of Trading Success is Preparation

At our recent trading roundtable we discussed the eight "P's of trading success. In this essay I want to focus on the second P, which is preparation.

Every once in a while you hear a story about an athlete who has over-prepared or overtrained for particular event. They work so hard in practice, pushing it right up until the start of the event, that they had nothing left in the tank once they got into the game or into the ring. For every one of those stories that is true, and I have no doubt that that can happen, I am willing to bet that there are 1000 athletes who fail from a lack of preparation.

Sure if you were going to make an error in preparation, tried the over-prepared rather than underprepared.

If you are a discretionary trader, then it is true that you have to have a certain amount of vitality to take on the trading day. Trading, after all, is very much like combat and you need to go in thinking and feeling your best.

So that is actually one aspect of preparation that we normally don't think about it that is ensuring that you are physically and emotionally prepared to take on the day. You should be taking a look at your diet, sleeping patterns, morning routines prior to the market opening, plans to take rest breaks during the day so that you can recharge your batteries.

Preparation includes establishing a comfortable, calm and stable work environment. Maybe the best preparation you can take is to buy yourself the most comfortable chair you can find unless you plan on trading from a standing position.

Normally though, we think of preparation when it comes to defining a trading plan and rehearsing the decisions that have to be made based on contingency scenarios that you developed prior to the market opening. Preparation includes rehearsals and visualizations. You want to do these in conditions that as closely approximate your trading environment as you can.

With this in mind, one of the best forms of preparation is live trading with real money but at a much reduced position size so that you can duplicate the actual trading conditions in every respect except for ultimate position size.

So as you put together your preparation plan, don't neglect yourself and your system maintenance as you put together your decision support template. Rehearse under game conditions. Remember to take care of you as well as your plan for optimal trading.

The Third "P" of Trading Success is Participation

In recent traders roundtable discussion, a group of experience traders were considering the factors that lead to trading success, and came up with the eight"P's": persistence, preparation, participation, practice, performance, perception, position-sizing, preservation. They concluded that your trading results would be a function of which one of these eight you were weakest in. This essay will discuss the ideas about participation.

The market is full of uncertainty and many times it seems like the more you analyze in the more you think about it the harder it is to actually pull the trigger. It is an inescapable fact that you cannot make money on the sidelines.

There are moments when the market is in sideways conditions and there's no apparent directional bias that makes sense. Clearly, there are other times when the market is trending either up or down and it becomes clear which side of the market you want to be on. Our nerves and apprehensions can lead us to way too long to get into the market and we miss significant portions of the trend. That's the case were lack of participation harms your trading results. It's a clear case also of trading certainty for performance.

If you have to be in the market to make money, then you have to find a way to accommodate your uncertainty and fear in order to participate. That means having an appreciation for probability and statistical distributions of returns based on market conditions. Participating in the market means that sometimes you're going to get burned and other times you're going to be wildly successful. But the bottom line is that you have to play if you want to win.

Our trading mastermind strongly recommends that you participate in group discussions and research and dialogue as a way to sharpen your skills, gain new perspectives, use each other for a sounding board, and then provide each other the emotional support that is necessary for people to deal with the constant drumbeat of pressure. In this sense, participation means cooperation and good citizenship.

The Fourth P of Successful Trading is Practice

 In our traders’ masterminds, we recently gathered together a number of successful professional traders and looked into the qualities that made us successful. We settled on eight words that started with the letter P to help us focus on the successful traits.

They are: persistence, preparation, participation, practice, performance, perception, position sizing and preservation.

This essay looks at the fourth P. successful trading: Practice.

there is an old saying that practice makes perfect, but there's another saying it's even more true: perfect practice makes perfect.

In sports, the idea of practice is to create the muscle memory that will allow your body to instinctively perform properly under periods of stress, when the game is on the line and there's not enough time to think. At times like these, your body will automatically do the things that he has been trained and overtrained to do.

In the military, this phenomenon can also be found when it comes to training battle drills. Military battle drills are designed to help soldiers survive on the battlefield under periods of great stress when thinking about the next action takes too long and may lead to death. The military strategy for training is to overtrain a task until it becomes second nature.

In a process of iterative training, the military will gradually increase the complexity and realism of the training situation until it becomes indistinguishable from the live event.

For example, a soldier may move from rifle marksmanship using dry fire techniques, to the use of blank ammunition, to the use of training aids and devices, to live fire under controlled conditions on a daylight range, tonight fire under controlled conditions, today like fire and maneuver, to nighttime fire and maneuver, to training with smoke and uncertainty.

Each progressive step adds complexity and uncertainty in the soldier is trained to respond to the environmental cue.

Traders can learn from this strategy by taking the individual pieces of their system apart and mastering each component. When components are mastered, the trader should then start putting the pieces together and paper trading the system without money at risk. Once the signal is fully understood and decisions are rehearsed, a trader should then begin prototyping their live trading with small dollar amounts to add the reality of real money at risk.

Once the trader can successfully trade with real money and in small position sizes, additional risk can be accepted and positions gradually increased until the trader discovers his natural risk appetite, which can be defined as the point at which the size of the position begins interfering with decision-making. Once that's been done, the trader now understands current level of normal trading capacity. Throughout the process of practice and rehearsal, the trader should be keeping a trading Journal in which his progression can be documented and reviewed as a way to improve professional competence

The Fifth 'P' of Successful Trading is Performance

A lot of beginning traders are under the mistaken impression that if they have a back tested system, good preparation, a relaxed state of mind that they have an almost certainty of being successful.

If only it were that easy. All the preparation and the world does not guarantee effective performance. We still have to get in the water and start swimming with sharks. Your judgment, self-discipline and stress management techniques will all be tested on a regular basis once you begin trading.

There won't always be enough time to double check all your rules, so sometimes you're going to have to use your best judgment when the unexpected occurs.

This is the main reason why actual performance of traders varies from the statistics of mechanically back testing systems.

By measuring the difference between your performance and that of a theoretically mechanical system you can determine what affect your judgment is having upon your performance. You could call this the trader quality number and use it as the basis for judging your skill improvement.

In order to judge the effectiveness of your performance you must keep good records, and set aside time at the end of the day, week, month and quarter in order to compare your actual performance against your benchmarks.

These comparisons allow you to determine if you're making progress in your skill development is a traitor.

Make sure that you take into account the market condition under which her performance is achieved, so that you can understand the markets influence on your outcomes. You could be a good trader with a good system but using it in the wrong market condition in your performance will suffer. Only your strategic judgment of using an inappropriate system would be bad, while everything else could be right on time. By fixing that one error in judgment, you would make a dramatic performance improvement.

you must group your performance numbers into Ben's based on the type of strategy that you're implying so that you can determine which system works best for you.

You should be looking at measurable concepts like risk to reward ratios, percent successful trades, size of the average winner and loser, size of the worst loss, size of the biggest gain, standard deviation of your returns. You should be putting your R multiple distributions and with frequency histogram to examine the variation of your data set.

Analysis of performance is every bit as important as back testing your next strategy, so make sure that you are faithful to your trading Journal and your professional discipline.