I thought it might be interesting to put together a list that summarizes my experiences, successes, failures, and the beliefs that grew out of that work. It’s not a simple list, as some of the bullet points contain more than one thought. I had fun doing this, and encourage you to do the same for yourself. Your list will be different than mine, but writing down your beliefs might be an important step toward structuring your thought and moving toward enduring success in the markets:
- I believe that markets are very close to efficient. Competition erodes any easy profits, and it’s very difficult to make money in markets. There is no free lunch—risk is the companion of any potential reward; they always go together.
- Simple things work. Simple patterns can show a statistical edge. Trading is not nearly as intellectual or complex as many would have us believe.
- There are many different ways to trade or invest; many different ways to make money in the markets. (The good news is that this means that many different personalities and approaches can find success in the markets.) The surprising thing is that all of these ways are hard to find, and even harder to implement.
- The markets are full of apparent contradictions and paradoxes. (My list, so far, should make this obvious!)
- Most of the things people talk about do not work, and certainly do not work as advertised.
- Trading is more about self-control than about anything else—more about what we do than about what the market does. Many of the challenges of trading stem from the fact that the market is the net result of the competitive action of many traders. This is why market movements seem to “provoke” the wrong actions and emotional responses—this is real. It’s not in your head!
- Risk management means making sure no one loss can take you out of the game.
- Expert opinion isn’t worth very much. We shouldn’t waste any time when a famous investor pontificates on a market’s direction or eventual worth. They don’t really know. If you simply spend a decade tracking these proclamations, this becomes very obvious.
- Similarly, all these “trading sayings” are highly misleading. There are few universal truths: never add to a losing trade, you can’t go broke taking profits, cut your losses—these, and every other trading proverb, only apply to certain styles of trading.
- Solid statistical analysis is important. Human intuition has a place in trading, but it is also highly misleading. A corollary is that sloppy or bad statistics are worse than no stats at all.
- Discipline is one of the most important things, but what people often miss is that discipline is a result—a result of process, having an edge, having a trading plan, and developing the skills of trading.
- The individual can be wildly successful as a trader or investor, and the main elements of that success are: having a method with an actual edge, having clear rules that define what you will and will not do, having the skills and framework to apply that edge, and having sufficient capital to generate meaningful nominal amounts from a reasonable percentage return.
