What trading skill fits you best?
We all get ideas in our head of who we would like to be as a trader/investor. However, for many, numerous years are wasted trying to trade in a manner that’s unsuitable and not unique.
Many hedge fund managers overseeing longer-term plays can dive into central bank monetary policy and GDP reports and everything that goes into those. They will notice patterns; they will see pieces of information other people don’t, and they’ll develop a whole macro thesis out of it. Great investors are deep thinkers. It’s a unique skill to do that kind of research and to dig deep and think globally.
At the other extreme, there are incredibly fast thinking and acting scalpers. Machine/algorithm trading dominates this world, so to compete, you need to be in the top percentile in mental math. A price ladder “lighting up” in a frenetic pace of two-sided transactions reminds me of my prop-trading training exercises taking turns to mentally calculate the relative value of particular combinations of debt market instruments.
If you find either of these approaches appealing, ask yourself if it’s who you are? Hint, if it is, you’ll be doing it already.
Not fitting into either camp, I think in terms of game theory, approaching opportunity seeking as a game to uncover. What I’m trying to decode is what set of moves will catch out a large enough number of participants creating sufficient price movement to benefit me. However, to create favourable reward versus risk scenarios, I must operate on an intraday basis. Move to a larger time frame, and I’m suddenly playing a completely different game against competitors who out muscle me in every facet of trading. To be clear, I’m referencing running a business, not owning a carry trade portfolio.
The decoding process I speak of requires problem-solving. Not surprisingly I’ve observed improvements in this area the older I’ve become, because this skill, also known as executive function, reaches its prime in mature aged adults.
I note numerous market behaviours and create hypotheses that connect all of my observations. I then monitor my thesis to be either proven or disproven by the market, participating accordingly.
Flanked by eight screens, I spend each entire trading day actively monitoring over twenty windows of varying data on the same instrument. This comprehensive monitoring is how I identify themes and market behaviours other traders miss. Combining these observations with a problem-solving approach is how I consistently operate in an uncrowded space, which is the entire reason I have an edge.
There is nothing, however, inherently brilliant about what I do. It’s more perseverance than by design that developed the approach I described above. The skills to extract themes from simultaneously monitoring many varying data sources is within reach of most, assuming sufficient effort honing the craft. That has been my experience consulting with other traders to develop a consistent edge. However, despite working with traders in their executive-function prime, I consistently see traders challenged with developing hypotheses born of problem-solving. The reason is the pace of development in this skill lags behind all of the other trading skills we work onand it’s quite common people apportion their attention to areas they see more significant short term growth.
However, rewarding payouts in trading are always a result of well-thought-out hypotheses. A hypothesis creates a template for a trade you can scale into, by providing the rationale for doing so. Trading a thesis is how you participate in a more extensive move overall. Rather than limiting you’re trading to the random net outcome of several positive and negative performing trades, participating in a hypothesis ties together a combination of trades of varying payouts to produce an overall net payout necessary for this business to be financially successful.
It’s my experience all successful traders work from the foundation of a thesis to provide the advantages just mentioned, regardless of their trading time frame and approach.