The secret to success that winning traders don’t want to tell you about

What can we learn from the most successful traders?

Magazine articles are filled with advice and quotes of wisdom from the planet’s most successful people. If we can learn their secrets, we can replicate their success, right?

This is where I should drop in an inspirational Warren Buffet quote!

And there’s plenty to learn about trading …

… the nuances of different markets …. technical analysis … price action … how fundamentals affect prices … risk management …

 If we know all these things … we’ll be successful, right?

Well, there’s another factor, that traders don’t like to talk about too much. It goes against so much of what we’re trying to achieve in control of our own financial futures …

… luck.

It leaves a bad taste in my mouth just admitting it – luck is for people gambling, playing the lottery or buying scratch-cards. It’s not what my trading career is built on!

Or is it?

Random or pattern?

Trading strategies are built on the theory that market behaviour follows certain patterns – be those looking at psychological reactions of crowd behaviour … or reading charts and technical analysis.

But – however thorough your research – there’s always external factors and noise that can mess up the best-made plans.

Sometimes, markets will behave exactly as we expect them to.

And sometimes, they’ll do their own thing!

This is where luck comes in.

Most traders will underestimate the role of luck in their trading – especially when it’s good luck, which we prefer to attribute to our skills and hard work. But luck is inextricably linked with the risk factor in trading – and in the superior returns we can achieve

How much does your success depend on skill?

There’s a rather depressing study done by risk analyst Nassim Taleb, investment strategist Michael Mauboussin and economist Robert Frank, which concludes that mediocre-but-lucky people were much more successful than more-talented-but-lucky individuals.

However, we should take heart. Despite what we like to tell ourselves, most of us are – by definition – of mediocre talent (although I’m sure that’s not the case for Trader’s Bulletin readers!) – which means that we have the same chance at success as the hugely talented (or at least those that gift their wisdom from the pages of Forbes magazine).

The study from Taleb, Mauboussin and Frank isn’t claiming that luck is everything – our skills matter. But it shows that we’re missing out a key element of success if we ignore the role of luck.

So how do we incorporate luck into our trading?

Get lucky

1. Never rely on luck. Luck alone is never enough for long-term success (just ask all those bankrupt lottery winners!)
2. Accept the role of luck – you cannot control everything. In each trade we take, we should evaluate our chances of success and of failure, accepting there’s an element of risk that we can’t eliminate. Likewise, don’t ignore the role of luck in winning runs.
3. Don’t use luck as an excuse to dodge accountability. If you’ve made an error in your trading, don’t just explain it away as bad luck.
4. Luck will only strike you if you’re in the right place at the right time – make sure you’re actively engaging in the markets.
5. If you’re wiped out by a run of bad luck, you won’t be around for the runs of good luck. Factor bad luck into your risk management to ensure you’re still in the game when your good luck comes along.
6. Keep building your skills and learning, so you know exactly what to do when good luck strikes.

You may not be the luckiest person – I know I’m not. But planning for luck (or lack  of it) will put you in the best possible position as a trader. Because the worst place to be is looking the wrong way when your big opportunity comes along!

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