Successful trading requires confidence; but, paradoxically, it also demands humility. You must realize that the markets are huge and there is no way you can master everything there is to know about them. Your knowledge of the markets can never be complete. You need to specialize in a certain area of research and trading. You can compare financial markets to medicine; a modern physician cannot be an expert in surgery, ophthalmology, psychiatry, obstetrics, and pediatrics. Such universal knowledge may have been possible centuries ago, but the modern field of medicine has become so huge that all physicians must specialize. They must choose one or perhaps two areas and master them. Outside of those areas they need to know just enough to avoid trouble.
THE THREE GREAT DIVIDES
A serious trader needs to specialize just like a serious physician. He must choose an area of research and trading that appeals to him. Here are some of the key choices every trader needs to make:
• Technical vs. Fundamental
Fundamental analysts study the values of listed companies or the supply-demand equations for commodities. Technicians, by contrast, believe that the sum total of knowledge about any market is reflected in its price. Technicians study chart patterns and indicators to determine whether bulls or bears are likely to win the current round of the trading game. Needless to say, there is a bit of overlap between the two fields. Serious fundamentalists often look at charts, while serious technicians may have some idea about the fundamentals of the market they are trading.
• Trend vs. Counter-Trend
Most charts show a mix of directional moves and choppy trading ranges. Beginners are fascinated by powerful trends: if they could buy at a bottom, so clearly visible in the middle of the chart, and hold through the ensuing rally, they’d make a lot of money in a hurry. Experienced traders know that the trends, so clearly visible in the middle of the chart, become increasingly foggy as you near the right edge. Riding a trend is like riding a wild horse that tries to shake you off at every turn. Trend trading is a lot harder than it seems. At the same time, one of the few scientifically proven facts about markets is that they oscillate. They continuously swing between being overvalued and undervalued. Countertrend traders capitalize on this chop of the markets as they fade (trade against) the extremes.
• Discretionary vs. Systematic
Applying your studies and indicators to a chart can be an exciting and engaging process. Discretionary traders keep turning their studies this way and that as they decide whether to buy, sell, or do nothing. Some traders enjoy this game, while others get stressed by this never-ending need for decision-making. System traders prefer to dump market data into a computer, test a set of rules for buying and selling, and then turn the system on and follow its signals. Another key decision in the markets involves deciding whether to focus on stocks, futures, options, or forex. You may want to specialize even further, by choosing a specific stock group or one or two specific futures. Whatever your trading vehicle, it pays to define your work along the three axes: fundamental/technical, trend/countertrend, and discretionary/systematic. Being clear about your likes and dislikes will help you avoid flopping around the markets, the way so many people do.
It is important to realize that in each of these great divides both sides are equally valuable. Your choice will depend primarily on your temperament. Professional traders tend to have an open mind. They are always curious about other people’s opinions and are respectful towards them. Only arrogant greenhorns look down upon those who
have made different choices.
THE THREE GREAT DIVIDES
A serious trader needs to specialize just like a serious physician. He must choose an area of research and trading that appeals to him. Here are some of the key choices every trader needs to make:
• Technical vs. Fundamental
Fundamental analysts study the values of listed companies or the supply-demand equations for commodities. Technicians, by contrast, believe that the sum total of knowledge about any market is reflected in its price. Technicians study chart patterns and indicators to determine whether bulls or bears are likely to win the current round of the trading game. Needless to say, there is a bit of overlap between the two fields. Serious fundamentalists often look at charts, while serious technicians may have some idea about the fundamentals of the market they are trading.
• Trend vs. Counter-Trend
Most charts show a mix of directional moves and choppy trading ranges. Beginners are fascinated by powerful trends: if they could buy at a bottom, so clearly visible in the middle of the chart, and hold through the ensuing rally, they’d make a lot of money in a hurry. Experienced traders know that the trends, so clearly visible in the middle of the chart, become increasingly foggy as you near the right edge. Riding a trend is like riding a wild horse that tries to shake you off at every turn. Trend trading is a lot harder than it seems. At the same time, one of the few scientifically proven facts about markets is that they oscillate. They continuously swing between being overvalued and undervalued. Countertrend traders capitalize on this chop of the markets as they fade (trade against) the extremes.
• Discretionary vs. Systematic
Applying your studies and indicators to a chart can be an exciting and engaging process. Discretionary traders keep turning their studies this way and that as they decide whether to buy, sell, or do nothing. Some traders enjoy this game, while others get stressed by this never-ending need for decision-making. System traders prefer to dump market data into a computer, test a set of rules for buying and selling, and then turn the system on and follow its signals. Another key decision in the markets involves deciding whether to focus on stocks, futures, options, or forex. You may want to specialize even further, by choosing a specific stock group or one or two specific futures. Whatever your trading vehicle, it pays to define your work along the three axes: fundamental/technical, trend/countertrend, and discretionary/systematic. Being clear about your likes and dislikes will help you avoid flopping around the markets, the way so many people do.
It is important to realize that in each of these great divides both sides are equally valuable. Your choice will depend primarily on your temperament. Professional traders tend to have an open mind. They are always curious about other people’s opinions and are respectful towards them. Only arrogant greenhorns look down upon those who
have made different choices.
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