Trading Advice From Millionaire Traders

Each trader forges their own path, usually by absorbing the knowledge of successful traders that came before them. While no quote or trading tip will make you a successful trader on its own, insights from successful traders can tell you where you should be focusing your attention, and what you should be working on. 

Here are four tips from millionaires and successful traders. Most of these quotes come from the Market Wizards book series by Jack D. Schwager. These books look at the diverse trading methods of successful traders and offer a wealth of wisdom for anyone looking to start trading.

Key Takeaways

• All of the millionaire traders mentioned here emphasized the importance of handling losses.
• Traders need to set realistic expectations for what they can achieve, and they need to know when to cut their losses.
• A stop-loss order based on technical indicators is the simplest way to control risk, and position sizing is also important.

Don't Be Afraid to Cut Losses

"If I have positions going against me, I get right out; if they are going for me, I keep them... Risk control is the most important thing in trading. If you have a losing position that is making you uncomfortable, the solution is very simple: get out, because you can always get back in." —Paul Tudor Jones

Loss aversion—an unwillingness to cut a loss—is one of the most common trading problems and can deplete an account quickly. On the flip side, not giving winning trades enough room to run can also be a problem. If you win less than 50% of the time, winners have to be bigger than losers on average. Even if you win more often, strive to keep your average loss smaller than your average win.

Learn Controlled Losing

"You have to learn how to lose; it is more important than learning how to win." —Mark Weinstein

Winning is as much about controlling losses as it is about racking up winning trades. If you make $1,000 one trade, but lose it (or more) the next, you're no better off. But if you can make $1,000, then only lose $700, then make $1,100, then lose $500, you are making progress. Trading is always two steps forward, one step back. Make sure the steps back don't erase everything you have done before.

Manage Your Risk

"Whenever I enter a position, I have a predetermined stop [loss]. That is the only way I can sleep. I know where I’m getting out before I get in. The position size on a trade is determined by the stop [loss], and the stop is determined on a technical basis....I always place my stop beyond some technical barrier." —Bruce Kovner

The stop-loss order is one of the simplest ways to control risk. Under normal market conditions, it will keep your risk limited to a specific amount of capital. With the maximum risk known, you can then assess whether the profit potential of the trade is worth the risk.

Instead of avoiding losses, focus your trading strategy on making your winners bigger than your losers.

Be Realistic

"I don’t think you can consistently be a winning trader if you’re banking on being right more than 50% of the time. You have to figure out how to make money being right only 20 to 30% of the time." —Bill Lipschutz

Does this seem like a strange statement? Recall that, ideally, winning trades should be bigger than losses, even if you do win 50% of the time or more. Most traders are searching for that elusive method where they never lose or can win eight or nine trades out of 10, amassing huge profits in a short amount of time with no risk. But successful trading takes time. There is always a risk, and it needs to be defined and controlled. As soon as you cap your risk, you invite the possibility of losing trades (reaching the stop loss). Ironically, though, that is more likely to make you profitable since the losses are small and controlled. 

When creating a trading plan and strategies, analyze them based on worst-case scenarios. Maybe you do tend to win 60% or 70% of the time (not unreasonable), but undoubtedly you will face periods where you only win two to four trades out of 10. How does your system perform then? Does it manage to keep your account steady or profitable? Or does the slower period result in big account losses? Plan for the worst case, assume you will only win 30% or 40% of your trades. In that way, your strategy is more robust, and during the periods where you do win six or seven trades out of 10, you will be a very happy trader.

Millionaire Trading Tips—A Final Word

All these traders discussed losses. Most novice traders like to think about winning or avoiding losses, but controlling risk is even more important. Anyone can make a profit simply because of random price movements. Successful traders focus more on controlling risk than dodging losses. When losing trades come—and they will—the trader only takes one step back, and doesn't erase everything made prior.

Have a trading plan, control risk, and focus on creating strategies that will keep you in the profit or steady even if you only win three or four trades out of 10. Eventually, you may win more than that, but it isn't wise to try to trade based on best-case-scenarios. Plan for the worst and your results will likely be better.