Wednesday, April 22, 2015

You Can't Win If You're Not Playing The Right Game

Mark Minervini makes an interesting point: the market is like poker in that the most important element of success is knowing which game to sit in on.  All too often, I find that traders in a slump focus on the hold 'em versus fold 'em choices of trading when, in fact, they're sitting at the wrong table.

How can we sit at the wrong trading table?  Several variations of this challenge immediately come to mind:

*  You're a momentum trader and you're trading a slow, low volatility market;
*  You're a trend trader and you're trading a choppy, range market;
*  You're a research-oriented big picture trader and you're getting caught up in short-term price action;
*  You're a skilled short-term trader and you're locked in a longer-term directional market view;
*  You're a contrarian fader and you're getting run over in high volume directional flows;
*  You're an independent thinker, but you're distracted and influenced by the views of others;
*  You're a trader who reads others well at the table, but you're isolated from other traders;

I've seen people make money in markets two ways:  by investing and by trading.  Investing means generating a big picture view and riding out short term noise en route to seeing that view materialize.  Investors are top-down thinkers:  they're analytical and their skill lies in putting pieces of research together to form a picture that others haven't yet seen.  Traders are bottom-up thinkers:  they recognize patterns as they form and act on them quickly.  Where the investor thinks deeply about opportunity over time, the trader thinks broadly about what's happening in markets at a given time.

A great way to lose money is to not understand yourself and how you're wired cognitively.  If you're a deep thinker, you'll lose money sitting at the trading table.  If you're a fast thinker, you'll lose money dabbling with investment theses.  The route to success is to be who you are when you're functioning at your best.  Working on improving your discipline, controlling your emotions, and following your process is not helpful if you're sitting at the wrong table to begin with.

Further Reading:  Patterns of Reasoning in Markets