I just re-read Market Wizards volume one and two. The methodologies are wide and varied, but I observed some common traits and skills:
1) Risk management
Don't bet the farm. Trade small enough that you'll be able to realize your edge over a large number of trades.
2) Scaling down during a losing streak and increasing size during good periods
Ed Seykota:
I handle losing streaks by trimming down my activity. I just wait it out. Trying to trade during a losing streak is emotionally devastating.
Trying to play “catch up” is lethal.
3) Patience
James Rogers:
It sounds like you have a great deal of conviction when you put on a trade.
Yes, I usually do; otherwise, I don’t bother doing it. One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. Most people always have to be playing. They can’t just sit there and wait for something new to develop.
Do you always wait for a situation to line up in your favor? Don’t you ever say, “I think this market is probably going to go up, so I’ll give it a shot”?
What you just described is a very fast way to the poorhouse. I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime.
Even people who lose money in the market say, “I just lost my money, now I have to do something to make it back.”
No, you don’t. You should sit there until you find something.
Tom Baldwin:
From your perspective, what does the average trader – that is, public trader – do wrong?
They trade too much. They don’t pick their spots selectively enough. When they see the market moving, they want to be in on the action. So, they end up forcing the trade rather than waiting patiently. Patience is an important trait many people don’t have.
Waiting for the right spot?
Right, I bet most people are probably ahead after their first five trades. They think, “This is great, like free money.”
But then they forget that the reason they made money on their early trades was because they waited a long time. They said, “I bet this is a good spot to buy it because I’ve seen the market act this way a lot of times.” And they made money. But all of a sudden, they are doing a trade every day.
The next thing that happens is they lose on a few trades, and invariably don’t know how to take a loss. They made money to start, and before they know it, they are even. Now they hesitate. “Where do I get out?”
4) Contrarian thinking/trading
5) Confidence in their approach
6) Discipline
Of course, you need a methodology/approach that gives you an edge. The above doesn't matter if not. But, on the other hand, you can have a profitable methodology that's not profitable if you don't master the above.
