Thursday, August 06, 2009

Trading, Entrepreneurship, and Confidence

The recent post emphasized the importance of finding creative trading niches. The great majority of traders I've known who have sustained success have developed their own unique "take" on markets. They either look at unique information, or they assemble existing information in unique ways. This enables them to see patterns that escape the attention of others.

One unusually successful trader patiently explained to me some years ago that he tracked a variety of commodity prices as well as the pricing of commodity options and futures for various expiration months. The relationships among the commodity prices--and the expectations built into the futures and options--told him which sectors of the stock market were most likely to outperform the others. So he bought those sectors and sold the likely underperformers. His trading was always market neutral: the general stock market could go up or down, but he would always make money as long as he was in the sectors that performed best.

He no longer trades that strategy; he felt that the long/short space became too crowded several years ago. Now he tracks completely different economic indicators to accomplish something similar among global stock markets. So, for example, he has been long certain emerging economies and short other, developed ones.

What initially impressed me about this trader was not only his work ethic and ability to view and trade markets in fresh ways, but also his confidence level. He was extremely confident, but not overconfident. His confidence was a direct result of finding his own trading strategies: ones that made sense to him and that he had researched. He could weather drawdowns and add to winning trades, because he knew how his markets performed.

What impressed me most recently about this trader has been his willingness to remake himself as markets changed. He didn't hesitate to replace one strategy with another when he saw opportunity fading.

No business market remains static. Successful businesses always have to remake themselves and adapt to changing economic and demographic conditions. Trading as a business is quite similar. The ability to detect opportunity and see the world through fresh eyes is a virtue of all fine business leaders. They don't come to markets to gamble; they approach markets as entrepreneurs.