The list of the world’s best traders is long but the names of George Soros, Paul Tudor Jones, Ed Seykota, Richard Dennis, Steven Cohen, Michael Steinhardt and John Paulson are very familiar to the financial audience. The common characteristics of their trading strategies are –
Great defense. Protect money. As Warren Buffet has said again and again, never lose money and never forget this simple thing. Primary focus should not be on making money but protecting capital. The best traders look for trades that can minimize the risk of losing money with a good potential upside. If they win, they make big but if they lose, they lose small.
Strong and balanced trading psychology. According to Steinhardt, one must balance the conviction to follow one’s ideas with the flexibility to recognize when a mistake is made. General traders keep holding losing trades, convinced that they are right and the trade is going to reverse and make money, which doesn’t happen and they face monster losses, wiping out or at least seriously damage their trading capital. The best traders acknowledge their mistakes and cut their losses short.
The best traders have various tools in their arsenal but they agree on the combination of Fundamentals, Technicals and the Market mood. They wait for the fundamentals to indicate an imbalance between the demand and supply, suggesting a major move. Then they confirm it by their technical studies for price signals and further confirmations and finally they check the current market sentiment. When all these three come together, the chances of the trade turning out to be a winner get much higher. Almost all of the best traders focus on catching momentum in the markets. They try to find a big move in its early phase and they rise it as long as it stays.
Obviously, all the best traders have their own solid trading processes which change the way they see trades. For them, a good trade can lose money and a bad trade can make money. From the perspective of a probabilistic market, a process can’t be graded by any individual trade. A good process can generate a losing trade but if that is repeated again and again, it will make money. By the same token, a bad process can generate a winning trade but repetitions of that same process can drain a lot of money. Luck doesn’t make one a great trader.