Lessons From Successful Traders

It’s a well-known fact among online brokers that most of their clients lose money – some more than others.

When the European Union started requiring forex and contracts for difference (CFD) brokers to disclose how many of their clients were losing money, it was a sobering moment. The best brokers, according to one survey, had two-thirds of their clients losing money. Among the worst, just 15-20% of clients were winning.

Hardus van Pletsen, CEO of online broker QuickTrade, says the ratio of winning to losing clients in SA mirrors that of Europe, but figures are skewed by a number of anomalies.

“A lot of brokers’ clients belong in a casino, not in the financial markets,” he says. “In fact, I think a lot of them have been kicked out of casinos because they are a danger to themselves, and so they end up with online brokers trading the financial markets. They are not serious about getting themselves educated, or about taking steps to mitigate risks. They want to bet on red or black. Try as we may to change bad investment habits, some people prefer to treat the financial markets as casinos.”

It’s a sentiment echoed by other online brokers operating in SA. Clients with little appetite for investing the time and energy required to educate themselves in the financial markets will continue to lose.

QuickTrade’s manager Jacques de Beer opens up a spreadsheet, with names blotted out, to demonstrate the point.

One client lost R667 000 in three days. Another lost R197 000 over a similar period. It’s clear from the trading history that the clients took big bets on the market but failed to exit the trades when they started to go wrong.

“That’s all that happened here,” says Van Pletsen. “People lose when they don’t have a strategy, don’t understand the technical or fundamental aspects of trading, and they don’t get out of a trade when it goes bad.”

De Beer then pulls up another spreadsheet showing some astonishingly successful traders. One trader stuck with just one security – the Nasdaq. He invested R2 040 into an account and in one day made 446 trades. In four minutes he doubled the account. Within 15 minutes he had taken the account to R27 000. At the end of the day, he had taken his account to R112 000. There were a number of losing trades on his account, but these were closed out quickly.

The same trader on another day generated a profit of R158 000.

“The difference here is that the winning trader stuck to a strategy, he was investing for very short-term gains, or what is called scalping, and he was getting out of the market quickly,” says Van Pletsen. “He had a number of losing trades, but he stuck to his strategy and got out at a predetermined stop-loss level rather than let the losses get too big.”

The trader was taking both long and short positions on the Nasdaq as the market changed direction. It happened to be on a day when the Nasdaq was particularly volatile, moved by geopolitical rumblings in Ukraine and concerns of mounting inflation in the US.

Van Pletsen concedes these results are exceptional, and most winning clients are doing between 20% and 50% a year.

What separates the winners from the losers

What separates the winners from the losers? Knowledge, trading to plan, and risk management, says Van Pletsen.

“There is no question that those traders who have educated themselves in the financial markets perform better. They do not have a gambling mentality. They have a trading strategy and stick to it.

“It’s important to understand that not every trade will be a winning trade. When a trade goes against you, you have to have a predetermined level at which you cut your losses. If you don’t have the discipline to exit the trade yourself, you must automate that by putting in a stop-loss to make sure you exit a losing trade before it does too much damage. You have to play the long game and look after your capital first, and let your profits accumulate.

“If you’re in a good trade, you have to maximise the profits, and that often means letting the trade run longer and avoiding closing out the trade too early. Experienced traders understand that you can do seven losing and just three winning trades and still win overall. Let your profits run and cut your losses early.”

Van Pletsen says it’s become something of a cliché in the financial markets that traders get too emotionally invested in their trades. The best traders are those who can keep emotions out of it, and treat it like a business. Losing traders tend to risk too much capital on a single trade, and then hang on to a losing trade too long until most or all of their capital is wiped out. They also tend to opt for maximum leverage, which amplifies both profits and losses.

Is it possible to make a living from trading?

It’s a question many newcomers to the markets ask, says De Beer. “The answer is yes, many people make a living from it, but it depends on how much capital you start with, what are your monthly expenses, and how much risk you are prepared to take. Our advice to newcomers to the markets is to take this seriously, protect your capital, and don’t take excessive risks.” 

Daily trading room briefings

QuickTrade has staff on hand to assist clients from 8am to 10pm seven days a week. Relationship managers keep an eye on clients’ trading performance and will intervene to assist those who clearly need guidance.

“We offer daily trading room briefings where clients can become part of the community – that’s twice daily. We encourage our clients to join these briefings where we share news, strategies, and insights. Our experience shows that those who make use of these briefings do better than those who don’t,” says Van Pletsen.

What clients are trading

Original article can be found at: Lessons from successful traders

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