If trading the stock market was simple and easy, it wouldn't be possible to build great wealth by pursuing it. Only a small number of individuals are willing to make the necessary effort over a long time that will make them rich.
Great traders never take the market for granted and never stop trying to improve their approach. They slog away at it every day and are always looking to find ways to improve their process. If they are persistent, work hard, and maintain an optimistic mindset, then success is a near certainty
We are currently dealing with one of the most difficult markets many participants have ever seen. This makes it a particularly good time to reflect on our many mistakes and think about what we need to do to navigate the challenges that lie ahead.
Every ambitious market participant must consider two major issues if they wish to improve their process. The first is discipline, and the second is style.
Developing an effective trading style is not that difficult. Most market players know the importance of cutting losses quickly and letting winners run. I constantly discuss many nuggets of market wisdom that will lead to great results, but the problem is that knowing what to do and doing it are two different things. We will consistently make the same mistakes many times. We will fail to cut losers effectively, we will sell winners too soon, and we will make poor emotional decisions many times.
Even the best investors in the world have to deal with this issue. Stanley Druckenmiller is widely regarded as one of the greatest investors of all time. When Druckenmiller was asked what he learned after suffering a loss of $3 billion during the internet bubble, his response was: "I didn't learn anything. I already knew that I wasn't supposed to do that. I was just an emotional basket case and couldn't help myself. So, maybe I learned not to do it again. But I already knew that."
Everyone who has actively traded the stock market has suffered a similar experience. We let emotions take hold, and we fail to do what we know we should do.
Unfortunately, there is no easy way to deal with this problem. We have to cultivate discipline, and it requires constant effort. The best way to develop more discipline is mindfulness. You have to keep reminding yourself of its importance. It helps if you have a very clear style and a set of rules to follow, otherwise you will just make decisions randomly and emotionally.
Rigid discipline won't do you much good if you don't have an effective trading or investing style. What works best tends to be highly subjective and vary depending on market conditions. What works best for one person in one market will be a disaster for someone else in a different market.
Traders are constantly tinkering with their processes and trying to develop the ideal system. The market will do its best to frustrate them in this endeavor, and they will have to adapt many times to ensure they are in tune with the market environment.
There are two very important stylistic change that I have made over the years, which has improved my trading more than anything else.
The first is to think in terms of reaction rather than prediction. Like most market novices, I thought that the best way to navigate the market was to anticipate what the market or stock would do in the future and then patiently wait for it to happen.
I soon learned that it was impossible to consistently make good predictions about what the market would do. I would be lucky and get it right sometimes, but the risk of being wrong was tremendous and very costly.
Over time I focused much more on reacting to conditions as they changed. Price is ultimately the only truth in the market, and that needs to be the main focus. I must have a range of strategies to deal with all the future possibilities and be prepared to be surprised quite often.
Most traders would greatly benefit from focusing more on their reactions to changing conditions rather than trying to predict the future.
The second stylistic change that I have made over the years is what I call an incremental approach. Rather than make a single buy and sale of a stock, I will make many smaller buys and sales as the stock develops. This approach is consistent with my view that prediction is futile. We don't know if you have the best entry or exit points, but if we average in and add or subtract from a position as it develops, we increase our chances of success.
There are many stylistic issues that I will be discussing in the year ahead. The key is to find the style that suits your personality and approach. I hope you will work with me in 2023 to become the best trader possible.