March 9, 2003
All Smart Traders know that the “market’ is an amorphous
beast. It is made up of many components, reasons and participants. Some use it
to “invest” their life savings. Some use it to trade client money or their own
money. Banks use it. Insurance companies use it. Moms and Pops use it. The list
is endless.
What does that matter to someone who is trying to daytrade
for a living? For the most part, nothing. The good news is that the more people
use it, the more “liquidity” there is. Period.
Most people come to the market with notions of the “Stock
Market”. They have access to putting some money in a mutual fund. Or they have
a few bucks and want to see what it’s like to buy a few shares of IBM. This may
occur on a large or a small scale. Most have been told, or learned on their
own, that, over time, they can obtain some degree of wealth this way.
Some decide to hold onto their mutual funds or stocks
forever. Some get the notion that they can “time” their buy and sell decisions
and begin to trade. Some do well. Many, if not most, lose money.
One of the basic reasons for losing money is the inability
to understand the difference between trading and investing. And since most
people get to the stock market through concepts learned from INVESTING, it’s
only natural that they would carry those notions over to trading. After all, we
are still talking about stocks, right?
WRONG. The successful trader, especially the successful
DAY TRADER, is able to disconnect from the idea of “INVESTING”. In order to invest in something, you have to
know a lot of information, such as earnings, revenues, industry, competition,
valuation, etc. Traders do NOT need to know this. They understand that while what’s driving the
whole beast is – yes – “stocks” – IT HAS NO BEARING ON THE TRADE. Until the
Smart trader can understand this, he will lose.
Most good traders enjoy trading “vehicles” related to the
stock market because of volatility, liquidity and transparency. What I mean is
that you have access to a big market which has many influences – often
conflicting – which can be seen by many participants and which creates moves of
significant enough size that you can profit from the moves.
BUT IN THE END all that matters is whether you were able
to “see” the moves, or price patterns, for what they were and were able to
profit from them.
Not whether the moves happened “because” of something,
like “the economy”, corporate earnings, announcements, rumors, or analysts.
When you reach the point where you understand that trading
is an exercise and skill of moving your own money in and out of trends and
countertrends, interpreted by you as a result of your trading plan AND THAT’S
ALL THAT IT IS, you will begin to make money.
In order to learn, sometimes we have to “unlearn” old
information. In trading, this is the key. Most traders would do a LOT better,
if they stopped thinking about the FINANCIAL MARKETS and started thinking about
how they were going to place the trade, what the dollar risk involved is, where
their exit point is and why.
Once you start “checking” your plan because of some idea
that Greenspan said this or that, or IBM announced “weaker than expected
revenues”, etc. it simply shows that you are not ready to trade, that you do
not understand trading and that you have no faith in your trading system.
Too many potentially good traders go down the drain
because they listen to the talking heads on TV or make the fatal mistake that
because the markets we trade (S&P futures/OEX options/QQQ or SPY indices)
are based on stocks, that Stock information forms the basis of our trades. This
is not true. Hopefully over time you will come to understand this. And you will
become a much smarter, and wealthier, trader.