Four Skills Every Trader Must Have

Does success hinge on one skill?

Many people say it does. They believe that a single special ability is the key to excelling.

But I’m not so sure. In my eyes, this narrow view of success only skims the surface.

Take Bill Gates for instance. Everyone knows he’s a programming genius. Most people probably credit his fame and fortune to this one talent.

But what about his flair for strategic thinking?

Gates is also a master communicator and skilfully collaborates with others. Without these abilities, Microsoft’s co-founder may have been just another Silicon Valley employee.

There’s a name for this: The Iceberg Principle. It states that only a small portion of information is clearly visible. Many of the key facts sit below the surface.

I believe the multidimensional nature of success is fascinating. You can apply it to almost anything.

In a minute, I’m going to talk about how to trade successfully. And contrary to what many people think, it involves a lot more than a wiz-bang entry strategy.

But first, let me tell you a short story.

It’s another example of how success rarely hinges on one thing. Viewing excellence from different angles can give you a new take on your own situation.

Beware of an Achilles’ heel

We recently attended one of my family’s favourite events — the Little Athletics State Multi-Event Championships. My kids got to compete with some of NSW’s best junior athletes.

If you don’t know, a multi-event is like a decathlon that you might see at an Olympics. Athletes compete for points across a range of events.

Success in this type of sport requires all-round talent. A single special ability won’t get you on the podium. Athletes need to score well in every event to stay in contention.

But all too often, a weak event ruins someone’s chances…

I saw top runners who couldn’t throw a shot put, excellent field athletes whose running skills weren’t up to scratch, and sprinters who couldn’t hold it together over 800 metres.

Watching the leaderboard shuffle around after each event was gripping. Slowly but surely it became clear which athletes had the full range of skills.

Trading is no different…

A successful trader needs to master a host of abilities. It simply isn’t enough to have a great entry technique. You must ‘score’ well in a range of areas.

It’s interesting to look back at some of my colleagues over the years…

A standout memory is of a foreign exchange trader during my days at Bankers Trust. He had just come over from another investment bank, and he had a big reputation.

I guess this guy was keen to make an impression…and he did exactly that.

In one of his first days on the job, I recall him losing over $1 million dollars. This was an earth-shattering event back in 1993. His stay at the bank was over in record time.

Now this guy had many hallmarks of a top currency dealer: He was assertive, lightning fast with numbers, and he had steely emotional control when under pressure.

But there was a weakness…

He didn’t always keep risks in check.

It was like the gun sprinter who couldn’t handle a discus. You can’t win a multi-skilled event without a full set of skills. Sooner or later, a weakness drags you down. 

A winner’s checklist

So how do you avoid a similar downfall?

The key is to be an all-round trader — not a specialist in one area.

Here are four ‘events’ in which you need to excel:

  • Trade size: Always know how much to risk on each trade.
  • Entries: Have a set of rules that you follow consistently.
  • Exiting losses: You need an escape route when it doesn’t go to plan.
  • Exiting wins: Maximising profits is the hardest task for many traders.

Let’s go through each of them…

First-up is risk. You need to decide how much you’re willing to lose on each trade. This will directly affect how many shares you buy.

Now, there are several ways to do this. I won’t outline them all today. The point of this update is to get you thinking like an all-rounder — not examine specific strategies.

Many traders overlook this aspect of trading. Instead, they stumble from trade to trade. Their decisions around position size is more gut feel than systematic.

You may be familiar with Quant Trader’s approach. The strategy is to invest the same relatively small stake in many stocks. This helps manage risk consistently.

The next area is entries. This is where many people focus all their attention. They believe entries are the only thing that really matters.

But this is wrong. Even the best buying tactics are useless on their own.

Quant Trader’s approach is to trade with the trend. The entry process involves buying into strength. I believe this increases the odds of making a profitable trade.

Strength is also an excellent screening tool. By only focusing on strong stocks, you automatically cull many under-performers. This helps you narrow down your choices.

Here’s the home stretch when it comes to trading

The final two points involve exits:

  • When will you exit a losing trade; and
  • How will you close out a profitable trade?

I believe that no other factors have a greater impact. Exits are a hugely important. Getting this right separates the best traders from the likes of my former colleague.

Most professional traders use a pre-set exit point or stop loss, for every trade. There’s no second guessing what to do if the market hits this level…you get out of the trade.

Quant Trader’s initial stop loss is around 25%. If a stock falls this much from the first buy signal, then the trade comes to an end. The exit is clinical and clear-cut.

Exiting profitable trades is just as important…

One of the biggest mistakes people make is to take profit too soon. Traders who cash-out early never get the big gains. They sell their winners before the shares really get going.

Quant Trader‘s approach is to use a trailing stop. The aim of this strategy is to keep you in winning trades for longer. You only sell when the trend appears to be over.

I’ll discuss these four topics in greater detail in future articles.

But for now, remember this: Trading success isn’t due to one special skill. Just like Bill Gates and the young athletes from the State Multi event, you need all-round abilities to reach the top.

 

Until next week,

Jason McIntosh,
Editor, Quant Trader

Editor’s note: A fine line often separates success and failure. The difference could have little to do with being the best in one area. Rather, it’s about who has the whole package.

Quant Trader is designed to guide you in all aspects of trading. The aim is to help you become a confident all-round trader — not a single event specialist.

If you think you could benefit from some professional guidance, then check it out today. It could change the way you trade forever.


Jason McIntosh is a professional quantitative analyst. Before he graduated in 1991 he joined Bankers Trust — a Wall Street investment bank — to be a trader. After Bankers Trust was taken over in 1999, Jason, already financially independent, co-founded a stock market advisory and funds management business called Fat Prophets. At 37 he sold his part of that business and retired. These days, he’s a private trader and system developer. In 2014 he launched the wildly successful trading service: Quant Trader.


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