Trading by Design

There are only three things you have complete control over in the markets. By focusing on these three factors, we can exit trades with more money.

They are:

1. Your perceptions of the current market;
2. Your mental decisions made, based on those perceptions;
3. Your actions taken, based on your perceptions.

Your perception of the market is likely the hardest to decipher. Having a fully unbiased perception requires a clear, rested, unemotional view of the markets. In my experience and from reading of many excellent traders over the years, the most successful traders gauge the market almost exclusively by their own analysis. Rather than listening exclusively to the latest reasons why the markets are moving from news headlines, expert analysis, or doom or boom predictors, they make the call themselves.

One strategy I use when I have market financial news, like Bloomberg or CNBC, on a secondary screen is to mute any volume. This will block out any bias the speakers give on potential market-moving news. I’ve seen traders cover the bottom of their screens to block out any breaking news. The headlines projected frequently don’t match the underlying story anyway. Your job is to know what is happening in the market, not why it is happening. The money is found in the what. 

Hedge funds have underperformed the markets for at least a decade now. Yet, their managers consistently make market predictions and traders often follow their guidance like a lamb led to slaughter. Just because someone can make huge gains moving hundreds of millions around for their clients doesn’t mean they could make a cent for themselves or you while trading.

In Alexander Elder’s book, The New Trading for a Living, which I highly recommend be on your reading list, he mentions the dismal results of the BIG guys trying to trade their own accounts after previously living on bonuses and raises from their hefty paychecks. Only when their own money is on the line does the real psychology of the market come into play.

“Most traders who leave institutions get caught up in the emotions of fear, greed, elation and panic when they start risking their own money. They seldom do well trading for their own accounts,” says Elder.

One thing is for sure: Experts will be wrong 50 percent of the time. I’d rather use my own clear, untarnished analysis of how the markets are based on my own understanding. Since I pick my own trades, it makes logical sense to me.  

You can either trade by your own design, or trade by mental default by relying on other sources.

Stephen Herto

Based on my analysis, I decide (#2 above) on sectors and industries that are ripe for the picking, and I will look for contenders in those groups. Next, I either sit on my hands for a period of time, or I get trading (#3 above).

When trading, it could be trading bullish, bearish, or neutral. Option trading easily offers all three of these choices. Equities can be held long or short with options like covered calls or cash secured puts to gather cash in neutral markets.

If your trading is suffering, you may be relying too much on outside resources for your perceptions, decisions, and actions. You can either trade by your own design, or trade by mental default in relying on other sources.

My last advice here is the following:

• Prioritize your perceptions of the markets, or someone will do it for you.
• Prioritize your decisions, or someone will do it for you.
• Prioritize your actions, or someone will do it for you.

Enuf said.