There are well-accepted success factors in trading. These include risk management, emotional control, having a tested strategy, and so on. However, I want to take a somewhat different approach to the topic.
Firstly, there is only one fundamental truth about placing a long stock trade: to make a profit, the price must go up after the purchase. To be a little more accurate, the price must go up by more than the fees and costs that go with placing a trade.
This might seem like an oversimplification. It might also seem very obvious. However, there is far more to this focus than meets the eye. Let’s look at some of the underlying influences on the direction of a stock price.
Technical and Fundamental Analysis
There are two well-accepted approaches to investigating stock value (company value) and future price expectations. These are technical analysis and fundamental analysis. Technical analysis is chart-based and looks at price and its derivatives. What this means is that the only two pieces of raw data available for technical analysis (of a stock chart) are price and volume. Everything else is derived from these. Moving averages, RSI’s, Stochastics, and so on, are all based on price and volume movements.
Fundamental analysis looks at the intrinsic value of a company via its financial reporting and business activities to arrive at a valuation of the share price. Management expertise, a raft of market outlooks, and other factors are considered in the valuation process.
The Concept of Price Discounting Everything
I would argue, though, that the old saying “price discounts everything” remains true. This idea says that the current price of a share is the price the market is willing to pay for it. Hence, all information that is available about the share is known to the market and its participants, and they have arrived at an agreed price. It is hard to argue with this.
Regardless of the validity of “price discounts everything,” it is true that the market has arrived at a price for the share you are looking at, and it has done so regardless of any opinion, desire, hope, or analysis that you have done. In other words, the market does not know about or care about your efforts. However, it does care about your trade. That is to say, if you place a trade, you become a part of the market opinion about the price of the share.
Trading Success Factors and Control
So how does this fit in with trading success factors? It means that a trader or investor absolutely must accept that the only event in your control after you buy a share is when you sell it. In between, you have no control or influence whatsoever. Most traders overlook this huge issue. I believe it is the root cause of all trader anxiety.
We humans like to think we are in control. But after we place a trade in the markets, we have no control over the price movement. We only control when we sell. If the price goes against us, there is a tendency to say, “I got it wrong,” or “the markets are crazy,” or something similar.
The Importance of Mindset in Trading
I suggest the very first success factor in trading is to understand what is going to happen the moment after you place a trade. Where is your mindset going to be? How will you react? Will you make rational decisions? At this point, it is easy to say, “Well, I will have a stop loss in place.” Yes, absolutely. Some form of protective exit makes sense. But where do you put it?
Imagine placing a trade with a very tight stop-loss. The maximum loss is therefore limited to a few dollars. Compare this to having no stop-loss at all. How would this feel? The point is that the most powerful success factor is not mechanical. You cannot write it down in a way that applies to everyone. Each trader must be aware of and factor in their own emotional reactions.
Conclusion
Price discounts everything. If the price of a share is rising, then trade with the movement and take comfort that you have done what you can to tip the probabilities in your favor.
The most powerful success factor is your state of mind.
