The stock market will always mean different things to different people. For some, it gives them the opportunity to try and punt their way to a fortune.
For others, it represents no more than an avenue to generating income. They invest in dividend-paying shares, which they also hope will appreciate in value over time.
But, irrespective of where you sit in this broad spectrum, there’s one aspect of trading that affects us all: how we approach it.
I don’t mean the usual stuff about a positive attitude and determination to succeed. We all know that already. What I mean instead is how we approach trading itself.
Right versus wrong, profit versus loss
For some, it’s more important to be ‘right’ than it is to be profitable. They’ll ride a loss all the way into the ground rather than admitting they got it wrong.
I don’t know a trader who hasn’t done this at some point, especially when they are starting out. They tear up money waiting for the market to come around to their view.
Others don’t care a jot about being right or wrong. All that matters to them is the result: how much did they make and, more importantly, how could they have got more out of the trade.
But there’s also something else that many of the most successful traders share. Jack Schwager, author of the famous Market Wizards series of books, highlighted many of these traits.
If you’re not familiar with his books, he interviews traders like billionaire hedge-fund manager Paul Tudor Jones, and Qantum co-founder (with George Soros) Jim Rogers. But the interviews aren’t just about trading strategies. For a start, not all are willing to share their secrets.
Where the books are more useful, though, is drilling in to see what makes these traders tick. As you might expect, discipline and confidence are two of the more common traits. All of the traders who were interviewed fundamentally believed that they will make money out of the markets. That is, they all believe they have an edge.
However, they are also disciplined enough to know that they’ll get it wrong. They have already planned the exit (for either profit or loss) before they enter the trade.
Of all the traits, though, the one thing Schwager noted that was shared by almost all the market wizards he interviewed was that they treated trading like a game. A game that matters very much to them, but a game nonetheless.
A Stock Market Game that Matters
The word ‘game’ conjures up images of something that might not really matter. Be it sport, a game of cards, or a board game. While we all want to win when we play games, there’s usually not much riding on them.
For traders running huge funds, the game does matter a great deal to them. Winning is a way of keeping score. But, in treating it like a game, there is something else that they are focusing on — something private investors might not do.
A game involves an opponent, and this is where these legendary traders focus their attention. They are constantly thinking about what everyone else is doing, and how they can beat them.
They want to know where the weight of money lies, finding the point where they believe the herd will change direction. It could be looking to go short when the market looks overreached and expensive. It could be buying mining stocks when all the commentariat tells them that the sector is dead.
These traders want to be on the other side of the trade when the market eventually corrects itself. Markets typically go too far in either direction. These traders want to be ready to pull the trigger before their opponents catch on, too.
This leads to another trait shared by all these traders — they are all fiercely independent. They want to work it out for themselves, and won’t take their cues from anybody else.
So when other traders look at the level of the Dow Jones, for example, these traders instead look to see what is driving the market. Again, where the weight of money is and what their competitors are thinking and doing…looking for a flaw in their and their opponent’s thinking.
Treating trading like a game also enables traders to do something else. It allows them to form a level of detachment about what they are doing.
It’s a way of not riding their trades too closely and not getting caught up in all the emotion with every tick of the market. This allows them to execute their plan clinically: hit their entries on cue, but always knowing in advance where they are going to get out.
To learn about a strategy which takes the most complete, rounded approach to trading the markets, click here.
Editor, Options Trader
From the Port Phillip Publishing Library