Since the birth of the capital market, humanity has had an intangible battlefield for fierce competition over interests, and various theories on how to combat in this battlefield have emerged accordingly. As a professional trader, one must act decisively in a booming market and remain cautious in a downturn. Neither recklessness nor timidity are suitable traits to have.
Wall Street's famous trader Jesse Livermore once said something thought-provoking:
"The difference between gambling and speculation lies in that the former bets on market fluctuations, while the latter waits for the inevitable ups and downs of the market. Gambling in the market inevitably leads to bankruptcy sooner or later."
Years ago, I pasted this saying on my trading computer. In the market, the most common issue we encounter is the speculation about price trends: “How high or low can it go?” These questions may be casual conversation starters or serious exploratory subjects, but they often reinforce certain ways of thinking. What will the future market trend be? How to predict or speculate the future? Such questions are constantly asked and discussed in real life, with a never-ending stream of discussants.
We often hear people proud of successfully predicting the market, which is a very normal and understandable mindset. To unveil and predict future market trends, "I have delved into a variety of eccentric prediction knowledge, from I Ching and Bagua, Zi Wei Dou Shu, to chaos theory, neural networks, astrology and cycle hypothesis, wave theory and Gann theory, and even orthodox macroeconomic forecasts." Of course, this knowledge to some extent provides help and inspiration for guessing market trends.
I have shifted my main focus from exploring future market trends to more practical aspects. Professional traders should focus on “identifying different market conditions, formulating corresponding trading plans, and executing these plans with strict discipline.” Such a shift is more conducive to effectively managing risks and controlling emotions, which are key factors for successful investing. Compared to guesses and predictions about future market trends, they tend to increase the volatility of investment performance.
Dow Theory suggests that “intraday noise” is unpredictable, which also made us recognize the limitations of human capabilities. Therefore, focusing more on “risk management, psychological control” and other practical operational mindsets is more helpful for us to make steady profits in the market. From my personal trading practice, trading with this mindset has enabled me to achieve steady and continuous profits.
Although I once respected and indulged in various theories, as a practical trader, I now value more the understanding and feeling of the market’s own language. It makes me wonder: Why are so many people obsessed with the capital market? Is it merely because of the allure of money?
For speculators, the essence of trading is straightforward: the risk you are ready to take determines what you can gain. As for how to take risks and how to gain, these are the issues that trading techniques need to address.
Without these understandings, you will never profit
As a professional trader, my understanding of trading is: the outcome of any trade is, in fact, random, just like the outcome of dealing cards in poker cannot be predetermined. In setting up a trade, there is no “assured outcome.” This is not a theory but a law. However, anyone who thinks they know the outcome of a trade in advance does not believe in this law. Traders must acknowledge that any trade or series of trades is part of the market's random nature.
Believing that the outcome of every trade is random is the goal experienced traders want to achieve. Once you believe in this market law, your trading behavior will change. It's like explaining gravity to someone who has never experienced weightlessness in a space station. No matter how intelligent they are, how much they know about the formulas of gravity, and the effects of distances between massive objects, they won't believe in the law of gravitation unless they've experienced it for some time in a space station.
Even if a person has ample knowledge in probability and statistics, they won't truly believe in the law of random outcomes of market uncertainty. Your brain believes in a pattern that is repetitive or has some certainty, which is a survival mechanism; your brain doesn’t like to survive in uncertain environments. But this concept is not suitable for surviving in the trading circle, and this is why most traders eventually face losses.
Experienced traders simply keep taking each signal without letting the outcome of previous trades affect their next one (assuming their rules allow them to continue trading after a series of profitable/loss-making trades). They may feel discouraged by a series of losses or excited by a series of profits, but they do not allow these emotions to interfere with the rules of their next trade. Because they believe in uncertainty, they are better at controlling their emotions, so emotions do not affect their trading rules. Not changing their trading strategy arbitrarily is the main reason for my profitable trading.
What I want to say is, one thing you need to do is define everything clearly. A plan that can explain everything that might happen.
You need to have a strategy with an edge, and you also need to understand the probability of profit for your next individual trade. Besides, a small portion of trades will almost certainly turn out completely different from what you expected. The advantage of a trading strategy is based on the probability of positive expectations over a large number of trades. In the short term, you can and will experience consecutive profits or losses, but over time, short-term results will differ greatly from long-term outcomes.
Consecutive profits will give you one feeling, while consecutive losses give you a completely different sense. Continuing with your trading plan after consecutive losses is counterintuitive and hard to do. However, whatever you think, what you need to do is to trade according to your trading plan and manage it according to your plan.
Before experiencing this, it's hard to understand the true meaning of doing so. Consecutive losing trades often lead a novice trader to abandon their strategy for another path. Then, they are likely to fall into confusion, unless they change, they are on a path of no return. Concerning trading, what you need to do is to make decisions in advance, you must know beforehand what the right choice is.
Novice traders are typically not taught this knowledge, almost no new traders have a comprehensive plan. They don’t understand the necessity of a trading plan. They only focus on how much profit they make. But the focus of trading must be on risk control, not on expected profits. You must pay attention to your losses, try to minimize losses and control them, considering every stop-loss scenario in your trading plan. The only thing you can control in trading is your losses, which experienced traders understand very well.
Regarding the trading plan, I suggest asking yourself the following questions when making trades, and only proceed with the trade after getting affirmative answers:
When making a certain trade, does the order requirement match my plan?
If the trade goes against me, at what point and in what manner will I exit?
If the trade is in my favor, at what point and in what manner will I exit?
Every experienced trader will eventually understand (I'm referring to those with at least several years of trading experience), the most important thing is to be honest and thoroughly understand yourself.
You need to know how you view and experience losses and profits. You need to be completely honest in clarifying your trading behavior under stress. You must learn to use these traits to your advantage.
In other words, you evolve from experiencing and reacting to observing and learning from experience. Most novice traders do not know their state in trading. They don’t know how to view money, gains and losses, and experience stress. Only time and years of self-reflection can let you truly recognize yourself in trading. And the market accelerates this process of self-realization.
Therefore, in my view, “being able to recognize oneself” is the biggest difference between these two types of traders.
In fact, novice traders cannot truly understand the effort and time cost required to become a truly successful day trader.
Many start day trading with the mindset of getting rich quick. However, traders with this initial intention almost always quickly deplete the funds in their accounts. Trading is not a joke, only by dedicating enough time to learning trading and paying the “tuition fee” in growth, can one survive and become a real trader.
From the above answers, professional traders believe the biggest difference lies more in psychology than in technique. In their view, understanding the nature of trading is the biggest difference between novice traders and themselves.
When it comes down to it, trading is all about perception and execution
In the deep exploration of trading, the real competition lies in cognition and execution! People's views are often limited by their cognition and cannot fully reflect the true face of things. Similarly, investors' cognition is limited and cannot fully understand market conditions. In this situation, everyone's perspective is just a prejudice towards the market. Only when your perspective can closely approach the true face of the market can it be considered a real “main opinion”.
Due to the limited cognition of the real face of the market, making mistakes is inevitable. However, we can reduce the probability of errors by deepening our understanding of the market. To bring our cognition as close as possible to the true face of the market, we must immerse ourselves in it and deeply perceive the pulse of the market. As the saying goes, "You can't capture tiger cubs without entering the tiger's den." Only by engaging in real combat, constantly experiencing market changes, and observing the reactions of prices, can we understand the true face of the market more profoundly and improve our level of market cognition.
When our cognition can closely approach the true face of the market, it is usually also the moment we make accurate judgments, dare to place heavy bets, or add to positions at the right place. However, our cognition is not always able to perfectly approach the real situation of the market, so we make decisions that are contrary to the market. In such situations, it is important to dare to admit mistakes and exit decisively. Conversely, for those investors who hastily exit when their market judgment is correct, or stubbornly hold on when their judgment is wrong, it's a significant cognitive error because they don't realize the limitation of human cognition.
Therefore, only by acknowledging the limitations of cognition can you calmly face mistakes, face losses, and see losses as a very normal part of trading. If cognition cannot approach the true face of the market, then cognition must be changed to think in line with the true face of the market. The errors and losses caused by cognitive biases must also be accordingly dealt with. This is where stop-loss comes from; it is a cognitive requirement, not for the sake of stop-loss itself. When cognition and judgment approach the true face of the market, this cognitive judgment must be continued, and the correct position also must continue until cognition deviates from the true face of the market. Then it is necessary to exit in time to prevent most of the profit from retracting; that's what taking profit is about. Then start over, recognize the market, and make the next trade.
Ahai's Conclusion:
Due to inherent human weaknesses, even though many investors have sensed the arrival of significant opportunities or danger signals, they still hesitate and lack the decisive courage to enter or exit. Therefore, establishing strict trading principles is crucial, using these principles to regulate one's cognition and execution, compensating for potential human weaknesses when facing the market.
In the bustling world, everyone is driven by profit. Faced with the temptation of "profit," human weaknesses are glaringly exposed, vulnerable without defense, unable to withstand shocks. As the saying goes, a gentleman loves money and gets it in the right way; not only should we pursue profit, but we must also find a sword to shield our human weaknesses, which is the ultimate method to gain wealth.
When it comes down to it, trading is all about perception and execution!
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