Rich Trader, Poor Trader

You know, one of the most common questions I’m ever asked is what’s the difference between rich traders (the 10% or 20% that make money) and the 80% that don’t? What is it that of all the traders that I’ve examined, the professional traders, the hedge fund managers, and my own expertise and experience as well . . . What is that differentiates the two?

And I took the data that I could get from brokers who gave me lots of anonymized data on thousands of clients to see, is there a difference? Are men better than women? Is there a certain time of day you should be trading? Are there certain instruments?

Is it better to trade stops than forex than to do indices or gold or commodities? Do you make more money if you go short then you go long? Are there certain geographies that you should be trading some periods of time?

What if statistically, I can show you that out of a group of 500,000 traders, the ones who held on to a stop or a currency for more than 5 minutes were more likely to lose . . . Or more than an hour or more than 3 days or vice versa than those who held it for different periods of time?

What if you could have that little statistical edge? So we looked into all of this data. I’m going to tell you that actually one of the most surprising things is, the different isn’t that big between the winners and losers. Just as in life. It isn’t that big.

Who Wins and How?

Let me take you through some of the issues, some of the differences that I found between the winning and losing traders. For instance, the poor trader they tended to have a few big losses. Losses where they lost in one trade more than 2% or even more than 1% of their total risk capital.

Whereas, for the rich trader, they rarely, if ever, had such losses. So how do you limit such losses? Well, one of the reason that they’re rich traders is that they have a small trading size. In other words, they trade a small amount relative to the total capital they have.

Also, they never added to their losing position. Another thing that we found the difference between winners and losers or the poor traders and the rich traders, is that winning trades in the case of poor traders were achieved by simply getting rid of a stop loss.

They were willing to take an unlimited loss in order to have that win, even if it was a small win. So they risked losing lots of money in order to have a small win. Whereas, a rich trader, they were happy to have winning trades because their stop loss got hit, even if, therefore, it meant that they had a lot of losing trades. But they were small losses because their stop loss was sufficiently tight, in order that they wouldn’t have big losses.

Lose, but never big is the key

The rich traders focus was don’t have big losses. That was a key difference. The other major difference was in terms of profit. Obviously, the poor trader—the losing trader didn’t have profits overall. They might have a few winning trades that were profitable in themselves, but they didn’t have profits overall because they had those big losses.

Whereas, the rich trader was profitable because their stop losses prevented big losses. That was the critical factor. What about money management? When it came to money management . . . The amount of money they put to a particular trade, the poor trader regardless of how volatile the market was—whether it was something as volatile as cryptocurrencies or the stop market or foreign exchange before a major election . . .

They backed the same amount of money in proportion to their total capital. But the poor trader didn’t account for market volatility. Whereas, the rich trader, they reduced their trade size if the market was more volatile, more noisy.

So “How do you measure volatility?” There’s all sorts of tools out there, like the average true range indicator which will allow you to do it.

But the rich trader, had good mentors who are able to teach all of this as well. All of this are critical factors to success, but in terms of strategy was a critical factor as well.

A Strategy for Stopping Losses and Adding to Winners

Similarly, when it comes to stop losses in strategy, there was no clear strategy for the poor trader. The rich trader, used volatility-based stop loss. The more volatile the market, the further away the stop loss. The more volatile the market, the smaller the trade size in the case of the rich trader.

The poor trader, profits—they never add it to their winning positions. Once they were in profit, they were never added to those profitable positions.

Whereas, the rich trader, they would start with a small position so they didn’t risk a big loss. If it got into profit, they would add more money to that trade because they were then risking the existing profits they have made. That was critical.

The Mind of a Trader

Finally, in trading psychology, the loser, they were unaware of things such as psychological biases. Whereas, for winners, they knew what biases were.

What’s a bias? A bias is a kind of psychological traps we fall into, where we have prejudices, preexisting beliefs, and we only look for information which reinforces our preexisting belief on a position.

Let’s say, therefore, we say, “No. No. No. I’m not getting out of this because 1 person in a 100 says I should still buy Sterling or still buy Dollars or the DAX or the DOW.” And that’s inability to be objective, which absolutely kills you.

So what are the top tips for being a rich trader? First of all, add to your winning positions. That’s critical. Trade a small size of your risk capital. Of your total risk capital trade a small size of that. Aim for short-term learning goals.

Always be looking to learn, to learn, to learn. And have a trading business plan. Develop that plan. Both for in terms of returns. How many trades are you going to do? If only 50%, are right. How much more money are you going to make on that than you’re going to lose of that 50% that were wrong?

Good luck.

Alpesh B Patel (@alpeshbp) - free online trading course