As a novice trader, you’ll have heard all the clichés about what makes a winner in financial markets. The successful trader has to be a cool-headed poker player, an iceman or woman with, to mix metaphors, nerves of steel. In the markets, it is a case of kill or be killed (financially speaking, anyway). Every moment is make-your-mind-up time. Deal, or no deal?
All very exciting, no doubt. But extremely misleading. The novice trader may be better advised to ignore all this high-adrenalin action talk and, and, as a starting point for discovering the secrets of trading success, contemplate the Greek aphorism, author uncertain: “Know thyself.”
For the would-be trader, this self-knowledge takes two forms. The first is having sufficient self-awareness to be able to select the right trading style for them. No two styles are exactly alike, any more than are two people, and the right style for one person may well be the wrong style for another.
No guarantee of success
One trader may focus on one or two assets – a , perhaps, or a particular or individual company – and research them deeply, giving themselves a significant edge in terms of making the right calls as to the next price movements. Another may trade opportunistically, perhaps using chart analysis to inform their judgment as to when a rising security is due a correction or an oversold asset is likely to bounce, known as a “status change” in relation to stocks.
Once they believe they have identified such a pending event, they would back their view with significant funds.
No trading style can guarantee success, but a shortcut to failure is likely to be the result of adopting a style that is unsuitable for the individual concerned.
The second vital aspect of self-knowledge relates to the biases inherent in the human condition, biases that, left unchecked, will make loss more likely than profit. One of the most widely-understood of such biases is known as the endowment effect, which steers people to value things that they own more highly, for no other reason than they possess them.
Think like a trader, not an investor
One immediate result of the endowment effect in financial markets is to bias traders towards taking long rather than short positions. Trading, by definition, involves a willingness to stand on either side of a trade, long or short, depending on where the best opportunities lie.
Another bias is known as loss aversion. Experiments have shown that people feel loss more acutely than gain.
Another such bias is the erroneous belief that a trading strategy, or any other financial-market position, “owes” the trader and will inevitably “come good”. There are several others grouped under the heading “cognitive biases”.
All this leads us to a key principle of successful trading, which is to remember at all times that you are a trader, not a long-term investor. Light-footedness and a nimble approach mark out the best traders.