I am sometimes asked what was the best trade that I have ever made. I honestly don't know. I have had some good ones that stand out but they were generally a matter of luck more than anything else. While it is nice to have big winners, I simply don't think of trading in terms of hitting home runs. It is a daily diet of strategy, positioning and hitting for average that produce profits.
What has worked best for me in my trading is to just slog away at it day after day. It is the routine, consistency of effort and steady discipline that produces good results over a long period of time and allows for compounding of capital.
The analogy of trading to baseball is a good one. The big difference is that as long as you have capital the game will never end. Warren Buffett once said that 'the stock market is a no-called-strike game. You don't have to swing at everything - you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling 'Swing, you bum!'
As traders, we have an unlimited number of pitches which means that you don't have to have a 'big inning' to win the game. You just need to keep hitting singles and doubles on a steady basis and you will win. There will be an occasional strikeout or home run but those should be taken in stride.
This inclination to try to hit home runs is easy to understand especially when you have traded poorly and want to make up for some losses. The temptation to throw caution to the wind and jump on the next 'hot' name is hard to resist but that is where it is the easiest to dig a deep hole.
If you want to know if someone is a good trader one of the best clues is how long they have been doing it. Good traders don't blow up their accounts because they consistently manage risk and make sure they stay in the game.
The problem with the daily slog is that it isn't as glamorous or as exciting as making the big calls and racking up a huge gain. Many, if not most traders, tend to believe that is the point of trading so they are constantly trying to hit the home run and end up frustrated and with less capital to invest.
The daily slog requires daily effort. The things you must do every day are as follows:
- Don't be too euphoric about gains or too depressed about losses. You will have both. That is the nature of the game. Accept the losses as part of the process and don't start believing that gains are an indication that you are a trading prodigy. Stay focused on the next trade and don't beat yourself up by dwelling on the woulda and coulda and shoulda.
- Constantly look for new trades. The lifeblood of trading is a stream of new opportunities. Many traders fail because they don't know how to find them. I spend a large part of each day scanning through hundreds of charts, reading news stories and doing research. The hunt for the next trade can be great fun but many traders end up with limited ideas because they don't work at it.
- Maintain disciple and risk management. Slogging away means doing the same little tasks on a regular basis. Make sure you consider stops and entry points every day. The market is dynamic and not static which means you need to constantly update your strategy.
- Embrace the inevitable cycles. The one great certainty of the market is that there will be uptrends and downtrends. Recognize that fact and when the action turns negative then play stout defense. Don't let trades become investments and vice versa.
- Focus on protecting capital. At the heart of my trading success is working to keep my accounts as close to highs as possible. Every day I have to ask myself if I am doing what needs to be done to ensure that there will be no major drawdowns.
The daily slog doesn't require that you be a full-time trader. It means that you make a little effort on a regular basis to ensure that the things listed above are being done. Stay focused on the pennies each day and the dollars will pile up over the long term.