What makes a successful trader? How does one define success? There are probably as many different definitions as there are unique values. However, my strong personal belief is that there is likely to be a unique answer that best fit you as a unique individual.
For me, as of today, my own definition of a successful trader is someone who has successfully traded for a living for the rest of his life. He meets objectives in most years. Never exceeded his maximum drawdown objective every month. He is never ruined. To successfully trade for a lifetime, it must fit his (evolving) lifestyle, what and where he wants his life to be.
If my definition is different to yours, that's okay too as we are unique individuals, in different circumstances, background, experience, future goals and plans, and we go through different stages of life too.
For example, some people must see Big $$$ wins to be successful. Amass tens or hundreds of millions of $$$. Bigger is better. But this is not a priority for me, and is not necessary for my own definition of success. It's not in my objective, and very likely, I will not achieve this as it is not in my objective.
For example, the great Jesse Livermore doesn't meet my definition of a successful trader. At his peak, he was worth hundreds of millions of $$$ which was a vast sum of money then. He lived very extravagantly most of his life when times were good. He was a feared trader by many. But he went bankrupt many times, and he died a bankrupt. The impact on his family was horrendous. He went through several marriages, divorces and family break-ups. The latter doesn't fit my very personal definition of a successful trader, in the sense that I would not use him as my role model, even though there are good parts that we can and have learnt from.
So, what makes a "successful trader" using my own personal definition? What do successful trader have in common, whether they are highly active short term traders, swing traders, or medium term traders?
To say that I have given this topic a lot of thought over the years is an under-statement. To cut a very long story short, my core belief is that trading outcomes are random and statistical in nature. You can tilt the odds by having sufficient edges, and so, I think the best role model are actually successful insurance companies and casinos with similar operations.
Introducing TOMIC and TOMC
So, allow me to introduce TOMIC (pronounced "Tor-mik") and TOMC (pronounced "Tom-See"). TOMIC stands for The One Man Insurance Company, and TOMC = The One Man Casino. Whilst trading coaches often don't teach these 2 terms, in my mind, TOMIC and TOMC are, in my mind, my best role models in Trading. So, you can think of yourself as TOMT or TOWT (The One Man/Woman Trader).
Why do I see parallels between trading and insurance/casino business? This is because all 3 shares the same statistical random outcomes in their trades, despite their edges and risk controls. The trader puts in a trade, making bets that either he win/lose, and the outcome is uncertain at the time of entry, despite the edges. Same thing with insurance companies and casinos. Insurers don't know if a specific policy sold will generate claim or not, despite the favourable edge in pricing, product design, underwriting, etc. Casinos also don't know if a specific game will result in win/lose, despite the edges they've built into their games. In short, the nature of each individual trade outcome is extremely similar in all 3 cases, despite the edges they have.
Yet, we know for a fact that there are successful insurance companies and casinos that have been around for decades and still growing stronger. Their business lasts a lifetime and more. Why shouldn't we use them as role models?
So, using TOMIC and TOMC as role models, what are the characteristics of a successful trader? Let's consider the following areas:
Characteristics of Successful Traders/TOMIC/TOMC
1. Sets trading objectives that fits them. TOMIC and TOMC sets objectives based on prior years experience and statistical modelling. "SMART" objectives.
2. Have target returns each year that is broken down into "controllable" factors (or sub-objectives) i.e. factors that the trader can directly control, i.e. RRR and momentum (driving payoffs and win rates driving expectancy), % capital risk per trade (e.g. 1% capital) and number of trades per month (e.g. 20). TOMIC and TOMC have different departments, each with unique objectives. For example, Sales and Marketing have their own "number of trades" objectives. Underwriting/Risk Management have their own unique objectives on how much is acceptable risk to take. Actuaries/Statistical Researchers/New game designers have their own unique objectives on the "positive expectancy" that they need to find for the new product/new game.
3. Once set, monitor and measure performance against these sub-objectives. For example, if they are required to make 20 trades a month, they will work as hard as required to meet this sub-objective. The relevant managers in TOMIC and TOMC monitor their own sub-objectives.
Trade Positive Expectancy Systems
4. The systems taught by Adam are positive expectancy systems in general, but many specific chart setups might not be. TOMIC and TOMC only sells products/games that have positive expectancies.
5. Broaden experience and horizons. TOMIC and TOMC are constantly on the lookout for new types of products/games that will add to their business growth.
Trade Entries
6. They only take entries that fits their positive expectancy system. Discipline is a given. If it doesn't fit, they don't take it. TOMIC never deviate from their underwriting rules - discipline and compliance is a given. TOMC doesn't offer games that are not in their casinos.
RRR/Positive Expectancy
7. Every trade entered meets an RRR of at least 2-3 times. No exceptions. They don't enter a trade if the RRR is less than 2 times, and look for another trade. All of TOMIC's insurance policies must comply with underwriting rules. All of TOMC's games have predefined rules that they cannot change.
8. During a trade, they ensure RRR is constantly at least 1 times, by raising stops if necessary. If raising stops becomes too tight, they close the position out for a profit. TOMIC will withdraw its products when it is no longer profitable. TOMC will close the game table if it turns out they've made a mistake.
Trade Plan
9. Design Trade Plans consistently, fitting the Big Picture and System, besides Entry Price, Support, Stops, Resistance, Targets, Position Size, etc. If using 2 x Daily ATR as stops, to get RRR > 2, this usually requires a new high, so, the broader trend must be there for this multi-week trade, and the stops big enough to withstand normal/slightly higher volatility from the expected time-frame of the trade. If using Daily ATR, the swing momentum must be strong enough to not trigger the stops unnecessarily. TOMIC and TOMC never deviates from their Trade Plans.
Keep all losses to 1R
10. No exceptions. Discipline is a given. No questions asked. Just move on to the next trade. TOMIC predefines the maximum risk they are willing to accept and take steps to make sure they stay within that risk, either via reinsurance, coinsurance or capping the risk size. TOMC makes sure every table have a fixed maximum payout. All losses in TOMIC and TOMC are predefined.
Profit Targets
11. Follow their rules that varies according to the Big Picture. If the Big Picture is still trending up, they raise stops and do little profit take beyond insurance. If the Big Picture is sideways, they take profits at resistance. If the Big Picture is trending down and they are long, they are faster to get out.
Position Size
12. Follow position size rules. If single entry, single exit, then, keep all risk per trade constant - e.g. 1% or 2% of capital. TOMIC and TOMC always follow their position size rules.
13. If pyramiding, the pyramid rules fits the Big Picture. If trending up, the pyramid can be more than one time. If sideways, might not be worth pyramiding. They should not go long in the downtrend.
Trade/Execute the Plan
14. One designed, they Trade the Plan. Stick to 1R loss is a given. Ignore "noise" (say within 1R gains). Once it becomes significant, manage it - e.g. Pivot stops or take profits/sell at resistance. TOMIC and TOMC always execute their plans.
Number of Trades
15. Keep finding new trades, even if the prior trades were stopped out at a loss. Don't question the system until there is sufficient evidence to show that the system doesn't work. Learn new ways of finding new trades. Work hard to find new trades. Don't give up when encountering losss - randomness alone can cause losing streaks of up to 10 in a row, and the system is still profitable long term. TOMIC has its agents & other distribution channels constantly looking for new policyholders to meet their sales "quota" or sub-objectives. Similarly with TOMC. These searches for new policyholders and new customers involves hard work and resources.
Statistical Outcomes
16. Accepts that trading is about probabilities, uncertainties, and the outcome are statistical. Give up the need to be right. Otherwise, you need other exceptional edges (that I don't possess), else, you will most likely not make meaningful progress as a trader long term. TOMIC doesn't try to be right, by over-analyzing. Instead, it keeps its underwriting rules practical, so that it gets as much business as it can without undue risk - it accepts the statistical outcomes of its insurance business. Same thing with TOMC - it doesn't try to be right by over-analysing its customers.
Psychology / Emotional Control
17. Within the statistical trading framework, you'll need attributes that makes TOMIC/insurance companies and TOMC/casinos successful. Think about what it takes to be a top professional in the insurance and casino field. Odds are, many of these characteristics must also be present to be a top trader. Things like only trade your rules which have been tested comes into mind. Get as many policyholders/customers/trades. Keep the bet constant. Keep playing. Don't be greedy. Don't get rich quick, but slowly. Give some to take some. Don't be fearful, keep the risk constant/small. Don't try to be right by Averaging down - if a policyholder makes a genuine claim, pay them and keep selling new policies to other insured/if a casino loses, pay the customer and keep attracting new customers. No need to keep selling to the same insured who has made a claim, or Average Down on losing trades. Casinos don't keep attracting card counters that makes money off them - they chase them away from their premises, they don't Average Down. Cheaper is not better. Don't keep checking on the policyholder - receive the premiums, make the claims, don't hassle him during the year every day, every week or every month - let trades evolves after you've designed them well, Trade the Plan. Even though I don't necessarily know you, my strong belief is that if you are able to run your trading business like TOMIC and TOMC, then, odds are you probably won't need much more additional psychology or emotional control to be long term successful.
Trade Well
18. The focus is following the rules, and accepts statistical outcomes. Breaking rules, even if it makes money, is dangerous habit. TOMIC and TOMC don't break rules, even if it brings in extra premium or profits today, because they know that long term, breaking rules ruins them.
Review Systems Performance after every 100 trades or yearly
19. Don't be so quick to judge a system after a handful of trades. Commit to it to gather data, try it and test it to see if it fits you. Don't judge by daily results or a handful of trades. TOMIC/insurance companies and TOMC/casinos don't.
Be Flexible/Continuous Development
20. Trade multiple uncorrelated systems over the long term. TOMIC/Insurance companies and TOMC/casinos don't just offer 1 product or 1 game.
21. Recognize that when more and more traders trade the same systems, the effectiveness reduces gradually. In time (e.g. many years later), it loses its edges. To be a lifetime trader, you need to be flexible and constantly experiment with new systems. TOMIC/Insurance companies and TOMC/casinos that don't innovate is eventually doomed.
Find Harmony between system and Trader
22. Only trade for a living systems that fits their personality, character, emotions. The only way to know is to test it for 50-100 trades via live testing.
23. When they found harmony, they are peaceful, calm, happy, and no longer subject to emotional roller-coaster. After all, TOMIC/insurance companies and TOMC/casinos don't feel these daily emotional roller-coaster. Management of these companies just do their jobs, focusing on their processes and sub-objectives that they control. They have statisticians/researches/actuaries that constantly monitor the changing dynamics of the markets they operate in (see 21.), and as long as this constant research is done, they don't get too worried. Trade what works, and set aside some time to keep researching on the side.
Be a part and give back to the community
24. They find other like-minded traders to continually sharpen their edge. They help new traders as the teacher also learns at the same time. TOMIC/insurance companies and TOMC/casinos belong to industry groups and make contributions to their own community regularly.
Trading is a Business
I trust, enough comparisons have been made above between trading and the businesses of TOMIC and TOMC, that the only conclusion we can reasonably make is that trading is a business.
In addition, from above, you should be able to differentiate "necessary business loss" vs "unnecessary business loss" for example. The "necessary business loss" is your 1R loss. For TOMIC, it is the "expected claims" that the actuaries have priced into their insurance policies. For TOMC, it is the "expected payouts" that the game designers have priced into their game design, to give them the edge. All these 3 are necessary business losses. Anything beyond 1R are unnecessary business loss. For example, the Claims Management department of an insurance company cannot just simply pay out claims outside the Claims Manual - anything in excess is unnecessary loss and is a sackable offence. Same thing with the Blackjack dealer - he cannot just simply give you a chip here and there, itself also a serious offence. So, if you don't know your 1R loss before entering the trade, you are not running a business, and you're making a serious offence - in fact, you are a Gambler.
A Mistake is when you don't follow your rules or if it's not in writing
If you are a Van Tharp fan, you will hear him repeat this many, many times. He doesn't use TOMIC and TOMC as role models, but he might as well have. In TOMIC, a mistake is when the Underwriter accepts the risk that breaks underwriting guidelines, even if the policy didn't make a claim. Staff could be sacked for doing this, even if there is no claims, because it exposes the company to risks that they cannot price. In TOMC, a mistake is if the Blackjack dealer changes his rules of the game on a whim - again, the dealer will be sacked as soon as this is detected. These are highly serious offences. Same thing with your trading - a Mistake is when you don't follow your rules. Van Tharp is fond of saying that if you don't have your rules in writing, then, everything you do is a mistake. Think of TOMIC and TOMC - their underwriting guidelines and their games manual are all in writing. They make sure everyone understands their rules in writing, because if it's not written, it's against the rules, and that would be a mistake.
Conclusion
Successful trading over a lifetime involves as much hard work as it is to run a successful lifetime business, whether like TOMIC or TOMC. It is not gambling, as gambling is one off and is not sustainable over our lifetime. I hope this article has provided you with some simple insights into my beliefs for a successful trading over a lifetime. I also hope that you find TOMIC and TOMC to be useful and good role-models in your trading career, for the rest of your life.
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