Successful investors rely on more than great rules and proven systems; they must have insight into their personality, temperament, and weaknesses. Additionally, a successful long-term investor will also have a strong philosophical foundation. Without these rules, even the most intelligent and skilled trader will miss opportunities and suffer losses that should have been avoidable.
In Chapter 5 of “The 30 Minute Stock Trader”, I shared why it is of vital importance to “Know Thyself”, and I explain in great detail the components of three elements that form the basis of our self-knowledge and awareness. These are your personality, your ‘edge’ and your beliefs.
You might be thinking that this is 2021 and all we need is a great ‘system’ that will run without us and make us uber-rich. Well, that’s just not how it works.
The system can indeed run (for a period of time), without human interruption, but the system itself is predicated upon the human it serves. In the programming world, there are machines referred to as ‘master’ and ‘slave’, and this is precisely the right terminology. What good is a system if it isn’t working according to your needs? A system built by someone else who has a different personality, goals and even defines ‘success’ and ‘risk’ differently than you are very unlikely to serve you well.
This is in part why I am so critical of the ‘establishment’ on Wall Street that forces everyone into the same kind of thinking, the same asset allocation strategies, and the same trading vehicles.
So before we can talk about systems, we need to explore ourselves. For many traders, especially experienced traders, this is a difficult endeavor. You might be accustomed to looking at charts and figures and numbers, but the truly difficult task is self-mastery. After all, if it was really just about numbers, the computers would already dominate the market and there would be no opportunity for humans, right?
The truth is that even the best high-frequency trading algorithms are written by men, for men, and serve the objectives of those men. Those computers ‘learn’, but that learning is all reviewed, processed, and applied by men to ensure that the ‘knowledge’ those computers have gained is consistent with the goal.
This process of self-discovery will lead you to important insights. For example, are you impatient? Are you self-disciplined? How do you feel when you lose money? How do you feel when you lose LOTS of money? How do you feel when you’re up to six figures in just one position? Will you be able to close out a position with the same ease and discipline whether you’re up to or down $100,000?
Do you find it thrilling to watch the charts update in real-time and see your portfolio rise and fall throughout the day? If so, this is a big red flag; you might have an emotional connection to profit and loss that will be an obstacle to your trading success (as it once was for me). Trading can become an addiction that turns you from master to slave.
In “The 30 Minute Stock Trader”, I devote a lot of time to these questions. You should get the book and read it, now.
In addition to personality, you need to have an ‘edge’. What is your edge in the market? Do you have better data? That’s unlikely. Do you have more knowledge, experience, or training? Probably not. If you’re reading this blog post, I suspect you may already have a tremendous edge by having multiple, non-correlated strategies that have been proven in live and back-tested simulations for beating the indexes. That’s a huge edge IF you have the self-awareness to build an automated trading system around it.
If you’re not using my proven methods, you must have some other competitive edge. After all, every buyer thinks he knows something the seller on the other side doesn’t know (and vice versa, of course). Is your ‘edge’ real, quantifiable, sustainable, and scalable? Can it be tested independently? Does it work in bull, bear, and sideways markets? Does it work with positions large and small? Or is your ‘edge’ more of a perception? These are important questions.
So far we’ve been talking about matters which are unique and personal to you, but there are some things that ALL successful traders share in common. I dedicated an entire chapter to this topic in “The 30 Minute Stock Trader”. Today I want to touch on some of the key points.
Before you can develop a strategy-let alone test it or trade it-you have to have well-defined goals and objectives. To put it simply, you can’t know how you’re going to reach your destination if you don’t know where you are, where you’re going, and what the different routes are to the destination.
You need to accept that there are not great opportunities every day of the year and avoid those days on which there are no ‘low-risk opportunities. The rookie is often eager to trade every day because he’s excited and impulsive, but the successful veteran knows that this is a path to financial and emotional ruin.
Successful investors know that good trading is boring. Some days are profitable, some not. Some days have big wins, others have small wins. Some days have big losses, others have small losses. A successful trader will be emotionally detached from the result. Yes, I know that sounds crazy. How could I not care about the outcomes? Well, of course, I care, but I know that it is the long ‘grind’ that is responsible for producing enormous wealth. A strategy that loses 40% of the time will make you ridiculously wealthy if those losses tend to be small while the gains are large.
Similarly, elite traders are more concerned with things like entry size rather than the entry price. Entry size is one of those rules you MUST follow in order to trade consistently and with discipline. Focus on entry price reflects a trader who is thinking about profit and neglecting the process. There is no true process that ignores the details, and ignoring the details is a fast path to ruin.
In the book, I have developed an extensive list of questions to help you identify your personality strengths and weaknesses as well as an immensely profitable collection of the belief systems all successful traders share. I strongly encourage you to re-read chapter six of “The 30 Minute Stock Trader”. If you don’t already have the book, you can get it from Amazon here. If you’d like to explore whether individual instruction is right for you, take a look at my trading mastery school and click this link, where I work with students one on one to improve their trading performance.
Thanks for reading and have a great day.
Owner of Trading Mastery School and Tradingsystems.com