This technique is so good, it should be illegal. If you can master what I'm about to tell you, you will make a killing in the stock market.
The biggest obstacle preventing you from quiting your day job and trading for a living is... yourself.
The smart trader does pay attention to fundamentals. He knows the key forces in the economy. He spends most of his time though on technical analysis as he works to identify which group, bulls or bears, are in control of a stock. Once he determines the dominant group (bulls or bears), he places his bet on that group. He also knows how to do fundamental analysis on a company.
Markets are in a constant state of flux or change. Smart traders are flexible people who adapt quickly to the always changing environment. Arrogant, stubborn people never do well in the stock market. A college educated fellow trader told me recently that he keeps losing money in stocks because he holds on to them for too long. I asked why he didn't start selling when he was 5% above his cost basis. He wouldn't do it because the gain was too small, and for him buying a stock was all about pulling in huge profits. A high level of education can be a handicap in trading. Brian Monieson, a famous Chicago trader, once said in an interview, "I have a Ph.D. in mathematics and a background in cybernetics, but I was able to overcome those disadvantages and make money."
Many college educated people are preoccupied with being right. Mathematicians believe that everything is about numbers, and lawyers believe that they are the voice of justice. On Wall Street, it is an insider joke how many teachers, lawyers, doctors, engineers, and scientists lose money in the markets. Why? Well it's not because they lack intelligence! It's because they lack humility and flexibility.
Another trader friend of mine told me recently that he keeps losing money in banking stocks because of the current banking crisis we are in. I asked why he didn't stop buying bank stocks and move on to another sector. He wouldn't do it because banking stocks have fallen so much and were so cheap, he just knew he could make a fortune once they started to rally. A week later he lost again in a bank stock and has only a few hundred dollars left in his trading account. It's not that my friend is dumb, on the contrary, he's a pretty smart guy. The reason is that he lacks humility and flexibility. He is a Taurus (the stubborn bull). He has a deep need to gain recognition by being right and he thinks that if only he can exert enough mental energy on the situation, he can figure it out and make a fortune in bank stocks. What he doesn't realize is that he's being arrogant. The market doesn't care what he thinks or how much mental energy he puts towards analyzing the situation. Because of his lack of flexibility, market participants are able to continually take money from his trading account.
Trading is war. If the enemy knows you are going to go marching down a certain path, at a certain time, they will set a trap, lie in wait, and ambush you. You have to be flexible and capable of adapting to the always changing market.
Markets exist in a constant state of uncertainty. Trading signals are always clear in the middle of the chart, but as you move closer and closer to the right edge, you find yourself in what John Keegan, the great military historian, called "the fog of war." There is no certainty, only odds. Here you have two goals—to make money and to learn. Win or lose, you have to gain knowledge from a trade in order to be a better trader tomorrow. Scan your fundamental information, read technical signals, and implement your rules of money management and risk control.
I hope you enjoyed this article and please feel free to leave your comments below. Thank you and happy improved trading.
Your Trading Coach
(because everyone, even Tiger Woods, needs a coach)