We've recently been discussing the critical success factors in trading. As a follow up today, I thought it would be fitting to expand on the same idea. I'm reminded of Vic Sperandeo's outstanding book Methods of a Wall Street Master, as he talks in detail about some of the more subjective success factors needed in this business. Unfortunately we can't detail all of his wisdom, so we'll explain the ideas most important to us.

1. Trade with the Plan. Stick to it. Every rationale, target, stop, and scenario should be thought out before the trade is entered. As Vic says, "confusion is your biggest enemy." The biggest thing you need to consider is your intended timeframe for the trade. If you know how long you want to hold the trade, the goals, stops, and volatility allowances will be easier to establish. But the bottom line is, plan your trade before you enter it.

2. The Trend Is Your Friend - Trade with the Trend. It's great to catch a reversal, but it's also very difficult. At least when taking a position with the market rather than against it, you can get off on the right foot. It all may change the next day, but you'll have at least a day's worth of cushion/gain. Taking a contrary position and praying for a reversal rarely works out well enough to make it worth doing.
 
3. Let Profits Run. Cut Losses Short. The second half (cut losses short) is the tougher part of this rule. It involves admitting that you were wrong. But in trading, rare is the case where you will eventually be proven right after being proven wrong. It's just not worth trying. If you struggle to cut losses short, you can counter-act that psychological devastation by letting your profits run (once your target is hit), and then telling yourself that not only were you right, you were really right, in that your target exit point was surpassed and you made a little more than originally planned. To do this, keep ratcheting up your stop-loss with each incremental gain above your original target.

4. Buy Weakness and Sell Strength. If you're waiting till the very end of a rally to make your exits, you've waited too long - you and about a million of your best friends are all thinking the same thing. Rarely does the end of a rally announce itself, and it never happens slowly enough to actually do anything about it (i.e. until it's basically too late). The same is true for bearish trades. This may seem contrary to # 3, and maybe in some ways it is. But the more important point of both of these rules is to maintain a trading discipline. The pros do, and so should you.

5. Don't Trade Off of Tips. A tip is rarely more than opinion, and frequently a bad one at that. Even if the tip comes from a friend, don't take it. If you have a hard time with this, go back to #2 - the trend is your friend. Burn this into your head! Unfortunately, in trading, a friend is not always a friend.

6. Never Trade If Your Success Depends on a Good (Lucky?) Execution. If getting a fill that is not currently marketable is critical, you may want to go back to #1 and make sure you're trading your plan. Great trade set-ups will always be great, even if you have to pay a little more to actually get into the trade. If you (or your broker) have to fight hard to get filled at a certain price, that's the market's way of telling you that this trade will not be an easy one to make profitable.
 
Victor Sperandeo's book Methods of a Wall Street Master is a great book for beginners as well as experienced traders. It also contains plenty of economic cycle explanations, market timing signals, and technical indicator tips.

Price Headley is the founder and chief analyst of BigTrends.com.