Thursday, January 19, 2017

The Foundation of Trading Success: Finding Multiple Ways to Win

Successful traders lay very deep foundations.

What does that mean?

It means that they find multiple ways to win and develop experience and expertise in each of those areas.

Think of any successful company:  a soft drink company, an automobile manufacturer, an electronics maker.  All have many products that they sell.  Each one is a potential profit center, and the combination of multiple profit centers creates a deep foundation for the business.  If one year SUVs don't sell, the auto manufacturer can sell fuel-efficient sedans or sports cars.  Multiple ways to win means that you can win even when some of your strategies don't.

The successful money manager creates a portfolio of relatively independent trades, each of which possesses positive expected value.  One idea might be to be long the US dollar because of interest rate trends and central bank policies in the US versus other countries.  Another idea might be to be long mega-cap stocks and short micro caps because of the anticipated impact of fiscal stimulus and tax credits.  Still another idea might be to buy agricultural commodities because of a change in long range weather forecasts from the best meteorologists.  Such a portfolio has multiple ways to win...if one idea doesn't work out, the others can.

Similarly, the active daytrader may trade a reversal pattern with active stocks near the open and then trade a surprise earnings report later in the day with a single stocks and then trade a trending stock into the close. Over the course of the day, the active trader has placed many trades, each with an edge.  It is the serial pursuit of opportunity that creates diversification each day.  One trade can fail and the day can still be profitable.

What that means is that successful traders must be able to innovate at two levels.  First, they must find new ideas and fresh opportunities.  Second, they must cultivate new sources of ideas and opportunity.  The first involves exploiting the edges we already possess; the second involves identifying additional edges.  The successful trader is never static, never dependent on one type of market condition to make a living.  Just as research and development is the lifeblood of technology and pharmaceutical companies, it is the source of long-term success for traders.

When successful traders aren't trading, they are researching, developing, and innovating.  When unsuccessful traders aren't trading, they're staring at screens and forcing trades.  There is nothing better for trading psychology than being at the cutting edge of a growing business.

What makes a trader successful is discipline:  doing the right thing with fidelity.  What keeps a trader successful is innovation:  doing new things and turning them into disciplines.