It is good to know what we don’t know
Let’s not pretend.
We don’t know, do we?
In fact two of the fundamental truths of trading tell us that:
- Anything can happen and
- You don’t need to know what is going to happen next to make money.
Seems strange but there it is – the truth. It is good to know what we don’t know.
This puts paid to the many analytical hours spent exasperatingly trying to forecast and predict share prices, and yes even technical analysts are more than guilty of that. Fundamental analysts may construct various models, projections and price targets about what the future offers but this is to little avail in guiding us to what share prices will really do. Thus it seems the contrarian was bred!
I know my (Stockradar) audience had become somewhat sceptical of this element of the work of fundamental analysts and are less keen that previously to assign capital based on those ‘predictive inconsistencies’. They have thus become more receptive and keen to pursue a ‘better way’ to drive consistent returns from stock market trading and investing. The basic tried and tested entry triggers work perfectly well so hours spent in pursuit of a ‘holy grail’ system often becomes an endless and futile search and this is where many struggling traders and investors miss the point. We don’t need to do that to make money and in fact the analysis of finding entry points is the easy bit.
There is in fact a much safer and controlled way and that’s called managing your money based around the probabilities of one thing happening over another and ‘charting a course’ to where you can’t lose more money than ‘X’ amount. Let’s call that the “X” factor, where X equals the maximum amount you are prepared to lose on any one trade. This can be represented as a percentage of your capital. It is important to understand it is your choice as to how much money you lose on a trade.
So where traditionally the focus has been applied to the analytical side of trading it is in fact to the ‘budget’ or ‘money aspect’ where income (profits) must exceed expenses (losses) that we must shift our main focus. A shift in understanding of how to trade markets profitably and consistently is dawning on us. And it has little to do with analysis that attempts to ‘forecast’. That’s not what successful trading is about.
One Stockradar member, who ‘gets it’, put it succinctly in an email to me last week.
‘Most people spend 80% of their time focusing on technical analysis (and their trading systems) – and perhaps 20% of their time on the psychology, risk management and understanding probabilities’.
‘I am 80% on the latter – and perhaps 20% on my trading system / technicals’.
There he finds his path to success.
My aim is to work with Stockradar members to provide a clearer understanding of what it is that drives a sustainable trading enterprise. Key to that is going back to basics and understanding the psychology of ourselves and our inbuilt biases, but it is also being aware that risk management (cost control) and a consistent play on probabilities are what really drive profits and that’s where our emphasis and ‘time spent’ should be. It will help build a less volatile and consistent path to building our wealth and it puts our primary objective as capital preservation. Once we clearly understand that concept, from there we can concentrate on building our profits.