Stock Trading requires Time, Patience and Grit.

We all need more of it. Time, Patience and Grit are three words I am going to focus on this article. Markets have phases, frustrating phases, that seem to lead us nowhere but then spikes in prices reward us for respecting time as a friend, patience as an attribute, and grit as a tool to fight the sometimes overwhelming need to ‘do something’.

We all know the plot. Moments of pause reflect digestion, contemplation and consolidation and they are necessary. All these ‘thought’ processes are going on in markets that are going nowhere but they are important time events to fulfill if we are to understand the behaviour of markets (participants), how they ‘feel’, what they’re thinking, and in the end the actions they are likely to take. The constant monitoring of these repetitive steps and responding appropriately is where time, patience and grit become the natural precursor to growth, knowledge, understanding and spirit.

These important trading specifics are commonly overlayed with more specific rules and approaches but the one I want to delve into today that very much respects the order of importance when trading in the zone is Mark Douglas’s book of just that title – Trading in the Zone. We know how freely and easily thoughts flow when we are in the zone. I find it happens on the water whether swimming or surfing the thoughts seem to come together naturally with an affinity with the environment I am moving with at the time.

Trading is not necessarily something we make happen just because we work hard. We firstly gain knowledge, move onto a degree of understanding, develop a style of our own, and then let it flow naturally and confidently as you build trust in a process. Even during this early phase of knowledge accumulation, Time, Patience and Grit play equally important roles. Taking the time to grasp the secrets of trading success such as Mark Douglas outlines in his book, Trading on the Zone, is a part of the knowledge accumulation and probably more importantly the respect and acceptance of these 5 truths.

The 5 Fundamental Truths of Trading:

  1. Anything can happen.
  2. You don’t need to know what is going to happen next to make money.
  3. There is a random distribution between wins and losses for any given set of variables that define an edge.
  4. An edge is nothing more than an indication of a higher probability of one thing happening over another.
  5. Every moment in the market is unique.

These are the 5 fundamental truths of trading outlined by Michael Douglas in his excellent book on behavioural analysis. Can you relate to, and accept, these facts?

What follows then is the principles that evolve from acceptance.

The 7 Principles of Consistency:

  1. I objectively identify my edges.
  2. I predefine the risk of every trade.
  3. I completely accept the risk, or I am willing to let go of the trade.
  4. I act on my edges without reservation or hesitation.
  5. I pay myself as the market makes money available to me.
  6. I continually monitor my susceptibility for making errors.
  7. I understand the absolute necessity of these principles of consistent success
    and, therefore, I never violate them.

There is nothing new or holy grail(ish) about these protestations, but they are vital components that guide a trading model and its execution. It’s a bit like an enactment if you not only want to succeed but also succeed consistently. A simple and regular review of these steps will produce accountability, automatic behaviour based on sound principles, an understanding of the benefits of process, and in the end confidence specially to see you through those times of market contemplation and seeming stagnation that can very quickly heighten doubt behaviour. That we very much need to control.

The buying is the easy part. The monitoring, respecting time for processing and assessment, and the selling, are the not so easy parts and here of course it is our own expectations that can define our success. Why are we so hard on ourselves and why do we expect so much? Remember point 3 on the Principles of Consistency:  I completely accept the risk, or I am willing to let go of the trade. This one gives us trouble, but it shouldn’t. Controlling the big losses is a big step in acceptance and understanding of the trading process.

In “The Disciplined Trader”, Mark Douglas’s first book he points out that typical traders often avoid creating principles and rules, because they simply do not want to take responsibility for the results of their trading. If you know exactly what you are going to do and under what conditions, then you would have something by which to measure your performance, therefore making yourself accountable to yourself. This is exactly what most traders don’t want to do. They would rather keep their relationship with the market somewhat mysterious, which creates a real psychological paradox for traders, because the only way to learn how to trade effectively is to make oneself accountable by creating structure, and with accountability comes responsibility.

As I better comprehend these issues and continue to grow as a trader I understand more and more and with increasing clarity the importance of controls and portfolio management to endear success.  Stockradar’s Trading centre contains 165 stocks, all of which we qualify, monitor, and disqualify according to the trading rules. Taken as a whole the success is true, but limited, as in the end following 165 stocks is an arduous task unless that’s your business and an unrealistic number of stocks to trade! There are many members entirely capable and who have the time to filter, assess and control the 165 stocks we analyse each week. Their involvement is active, controlled, disciplined and confident.

But without the quality control of such portfolio management success is limited. This is where the other controlling aspects of trading for success must be appreciated. With those controls it becomes an entirely different prospect. Thus, the development of the portfolio side of Stockradar’s business. High conviction and high success but we respect the processes and the time, patience and grit involved in achieving this. Not every year is a winner but once you’ve bought in to a good process don’t second guess it.