This is a solid guest blog post from a like this young but successful trader.student who has realized what it takes to be a great trader
Infallibility would make you great so the title is a bit of a misnomer. The thing is that no one is infallible. Nobody can tell the future and no one has a formula. This is something I have said time and time again. The real key is to win more than you lose. That does not even mean the number of trades. If you happen to win big and lose small that works too, even if you lose quite often. You just have to win really big when you do win.
One Great Win is Not Enough
A couple of high profile victories is not enough to really establish yourself as a seer of things to come. Not sure any number of wins can really establish that, but it definitely is not one or two. That does not mean someone is not smart. It actually is not so much of the fault of the person. I like using John Paulson as an example, because he did not really actively seek out the interest that surrounds him. I suppose I should be harsher on the financial reporting media.
Download the key points of this post as PDF.
The point is that Paulson made his bones on the real estate crash, and so far his gold play has not worked out as expected though I am sure he is doing just fine. George Soros has not had something on the scale of his monumental pound play, but he has been a solid investor in the mean time. The point is that one win or one loss does not really make someone worth following. Being a solid investor over time is far more difficult than one big win, and more indicative of true skill.
The same thing applies to trading. Winning consistently, or at least making money consistently, makes someone more interesting to look at and learn from than someone who happened to choose right once.
What does it take to be a good trader for a year, two years, or three years in a row? I think that traders do not give enough deference to luck, but at the same time you cannot go completely the other way. Someone who consistently makes money trade after trade is skilled in addition to being slightly lucky. Luck and skill are intertwined as I have mentioned before.
One great win is fantastic marketing. It is a great people to draw people in, and is a completely valid technique. A small newsletter with one trade that made $20k is impressive. A large hedge fund that made $1 billion off one trade is also impressive. People are wired to be drawn to things like that. The really important part of the equation is consistency. The consistency can be on a smaller scale. Not every trade is in the thousands, and it does not need to be. You cannot blame the marketer for tailoring the message to what people are most likely to notice.
The real problem with some of theseis that one great publicized trade might cover up a series of losses. It is obviously not on purpose, except when it comes to penny stocks, but it burns nonetheless. Do not believe penny stock . That should go without saying. Those are marketing pieces extraordinaire, and it is amazing that they have the impact they do. The whole system relies on suckers not savvy traders. It is not a bunch of people in the know piling in and trading it like champs. Some people might be trying for penny promos, but it is a minority. The system would breakdown if someone was not losing money.
Moral of the Story
A lack of consistency can come from pie-in-the-sky dreams and expectations. Consistency comes from playing it smart and doing what you know is right, not hoping for something better. The big wins will come out of nowhere. Just be there and ready to act when they do. However, standing there waiting for a big win while keeping your money on the line is a bad strategy.
Ever seen Happy Gilmore where Happy decides that getting a hole-in-one is easier than anything else so he’ll just try that. The entire rest of the move was about him learning to putt. He never got another long hole in one. Even the great shot at the end was not the first. If there is anything we can learn from Happy Gilmore, words not often said, it is that you let the magic happen when it happens but you do your best to play the game like the rest of the mortals. You need to know how to put.
Just trade. Play your game as you would play it, and you might make the miracle hole-in-one. Chasing the 500% play after you are already up 30% is insane. This is the old don’t be greedy adage. I would say don’t not be greedy. A double negative saying be greedy. Just don’t be stupid. Trade and research and look for the plays. Do it to make more and more money, but be smart.
Life is hard enough without being nuts. Aim for consistency not one-shot greatness. In the long-run consistency will be the better choice. On the other hand if you hit the one-shot jackpot and you are done, then you can go retire. If you go chasing another win like that you might end up worse off than you started.