The Qualities of a Successful Trader

By Elliott Wave International's Robert Prechter, Prechter's Market Perspective
Oct 7, 2005

October begins major league baseball's playoffs, an annual reminder that those ballplayers and teams who make it this far share two common traits: discipline and coolness under pressure. The John Smoltzes of the world (star pitcher for the Atlanta Braves) didn't make it with a casual attitude about work. Smoltz had the discipline to pitch successfully in the major leagues for 14 years, and the mental toughness to win the post-season games that count -- as he did on national television Thursday night against the Houston Astros. Traders and investors may not perform in public, but they still need to possess discipline and mental toughness to succeed. In this excerpt from Bob Prechter's question-and-answer book, Prechter's Perspective, he talks about the qualities of a successful investor.

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What qualities do you feel contributed most to your success as an investor?

Bob Prechter: When I have been successful, it was due to discipline, which usually means taking decisive action immediately when called for. When I've lost money, it is because I did not do that.

Describe that discipline.

Bob Prechter: When I first began trading, I did what many others who start out in the markets do: I developed a list of trading rules. The list was created piecemeal, with each new rule garnered from books on trading. I would typically add a new one following the conclusion of an unsuccessful trade. I continually asked myself, what would I do differently next time to make sure this mistake would not recur? The resulting list of do's and don'ts ultimately comprised 16 statements. About six months after the completion of my carved-in-stone list of trading rules, I balled up the paper and threw it in the trash.

I'll bite. Why?

Bob Prechter: Well after attempting to apply the 'rules,' I realized that I made not merely a mistake here and there in the list, but a fundamental error in compiling the list in the first place. The error was in taking aim at the last trade, as if the next trading situation would present a similar situation. When rules are situation-specific, you can't apply them generally. In fact, they lead to contradictions.

Like what?

Bob Prechter: Well, let's take rule #3, which reads, 'Stay cool: never let emotions rule your trading,' and #8, which reads, 'If a trade is obviously going against you, get out of the way before it turns into a disaster.' Stripped of its fancy attire, #3 says, 'Don't panic,' [Editor's note: Notice this same advice in A Hitchhiker's Guide to the Galaxy] and #8 says, 'Go ahead and panic!' Such formulations are, in the final analysis, utterly useless. And believe me, this is the typical method used to generate lists of trading rules.

But there must be some steps you can advise for the average investor?

Bob Prechter: Well, my best advice to the average investor is stop being an average investor. You cannot survive as an average investor. The pros will beat the pants off of you, and the markets will, too, because what seems logical is exactly what will not happen. That is one of the first keys to understanding how not to lose money in markets. So step one is: stop being the average guy or the average gal. Get a foundation. And the only way to do that is to start reading.

Can you just imagine deciding tomorrow: 'I think I'm going to be a structural engineer, and I'm going to build a skyscraper. I'm going to go get some wood and some bricks and get going.' You haven't read the first thing about it. You haven't studied it.

Why do people think they can trade without doing their homework?

Bob Prechter: People reach the ripe old age of 60, they've worked all their lives in a business that they know inside and out. They know a competitor couldn't walk in and take over from them without knowledge and work and study and experience. But they decide to put all their money into silver futures, because they're sure they will go up. They don't study the craft. They don't realize this is work. It takes effort and study. To do it right, to be a winner, you've got to understand how the markets work and what's going on. If you want to take risks, become an expert. Otherwise, put your money in areas that have as little risk as possible and forget about investing. Before you make that decision, understand what's involved. Making money in the market requires a good deal of education, like any craft or business. If you've got the time, the drive and the right psychological makeup, you can enter that elite realm of the truly successful trader or investor.

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