I’ve come to learn that stock trading is all about process. That is: you must have a process, you must stick to your process, and, most importantly, you must have a passion for your process. If you view trading as a continuous process, it becomes much easier to recognize what the market is telling you.
Best selling stock market books with titles like Beating the Street imply that the stock market is a game to be won. But what they don’t tell you is this: your lifelong understanding of games prevents you from intuitively understanding the stock market.
Every other game you have played since you were a child had a predefined ending: baseball ended after the 9th inning, football ended after the 4th quarter, Risk ended when one player occupied every territory on the game board. No matter what you did, which decisions you made, or how hard you played, games always ended. Either time ran out or a player accomplished all of the tasks required to end the game.
The stock market is not like this. There is no game clock and there are no predetermined tasks that, once completed, guarantee victory. Your stock positions do not automatically end. You cannot win with a jumper at the buzzer because there is no buzzer to save you from the impending market correction. A winning trade is wholly dependent on you.
Since nothing inherent to the stock market tells you when your position should end (or to begin for that matter), you must create a process that does this for you. While I am sure that everyone’s process is a bit different, I believe that any process, in order to be followed, must be rooted in the lessons you have learned from the markets.
Here are a few of mine:
- Price is the market’s only way of telling me what’s happening. The only thing that determines if a market is in an uptrend, a downtrend, or consolidating is the price.
- Following a Risk Management Plan is the key to successful trading
- When market conditions are poor (no identifiable trend), reduce overall risk by reducing trades and reducing risk per trade
- When market conditions are poor (no identifiable trend), reduce draw downs by holding a large cash position
- Consolidation patterns or range contractions can break either way. They should be thought of as an indicator rather than a trend
- Forget about being right. You will be wrong (often) and still win if you follow your risk management plan and…
- Honor each and every stop
Developing a process to apply to each and every market position and focusing my attention on following that process has helped me to become a better stock trader and investor. It has helped me to see what the market is telling me. I hope it will do the same for you.