Sharpen Your Trading Skills

Foreword from ShareInvestor

This article “Sharpen Your Trading Skills” by R Sivanithy was first published in The Business Times on 18 Apr 2005 and is reproduced in this blog in its entirety.

The 1993 and 1999 bull runs in the local stock market promoted a great falsehood, one that has to rank alongside the likes of ‘the cheque is in the mail’, ‘don’t worry this may be a recession but we’re not retrenching’ and, the greatest of them all, ‘I’ll love you forever’.

We’re talking, of course, about the myth that the stock market is an easy place to make money. Anyone who believed this would have found out rather painfully that it may be an easy place when everything is rising and everyone is bullish. But more often than not, it’s virtually impossible to make money consistently. Put differently, the market is always smarter than you think, and although you might be able to beat it now and again, you can’t beat it all the time.

Yet, there are some traders who have managed to beat the market day in, day out and have managed to post superior profits on an extended basis. Of course, making big money is always easy if you have inside information and are able to trade before the market gets hold of this information. But we’re talking here of traders who have no extra knowledge other than their own wits and abilities.

Super Traders

They are a very small minority known as ‘super traders’ and have been featured in two books, Market Wizards and New Market Wizards, by author Jack Schwager, who sought to figure out how this elite group of individuals managed to rack up their impressive track records.

Schwager interviewed the best traders in the various fields, ranging from currency chartists to stock pickers who rely on fundamentals. He found that the most important requirement was not an academic qualification, nor was it overwhelming intelligence; rather, it was an all-consuming commitment to their craft, together with the willingness to put in an enormous amount of hard work.

The link between hard work and success is, of course, tried and trusted, but the extent to which some of the top traders will go is extreme. One commodities trader, for example, studied the market full-time for four years before building up enough confidence and knowledge to trade.

He studied charts going back 150 years to develop recognition of patterns and cycles and spent thousands of hours poring over charts and refining his charting techniques. His performance? An average return of 52 per cent per year for 10 consecutive years.

Not all top traders use charts. Some employ a hybrid approach that combines technical analysis with fundamentals. One trader used the latter to pick undervalued companies, then looked at the charts to time his entry and exit.

Interestingly, he always bought when the market was rising and close to a recent high, which is contrary to the ‘buy low, sell high’ advice that most people tend to follow.

He did this because if the company’s fundamentals were strong, then the fact that the shares were close to a recent high meant it was technically strong as well, thus giving him double assurance that he would make money.

Personalise Your Method

Whatever the approach, Schwager found that having a unique, personalised trading method was essential for success. In addition, it was important that the method – either with or without charts – suited the trader’s personality.

He said: ‘If you can’t stand to give back significant profits, then a long-term trend-following approach – even a very good one – will be a disaster because you will never be able to follow it. The approach you use must be right for you; it must feel comfortable.’

This is an important lesson which many people overlook. Essentially, it says you should trade within your means. For example, a risk-taker may be more comfortable with larger positions than someone who is risk averse.

In a nutshell, there’s no single, magic formula for success as a trader and, indeed, for the bulk of people, a simple ‘buy and hold’ may be the best investment strategy. Others may be happy with intraday trading. Yet others must always be involved in the market, no matter what the conditions are, thus adhering to the ‘you have to be in it to win it’ philosophy.

There’s also the question of talent, luck and discipline playing a huge part in the success of the top traders, qualities which many of us do not possess in abundance.

But for those who do take the time to sharpen their trading skills, who knows, you just might be able to succeed. At the very least, it might help minimise losses brought about by believing that other great market untruth: ‘Don’t worry, be patient because the market always comes back.’