While I’ll forever stress for you the dangers of “trading” stocks, as opposed to “investing” in companies, I find the characteristics that define the best actors from both domains to be virtually the same.
Mark Douglas, in his insightful book Trading in the Zone, identifies what it takes to become a successful trader. Adopting the following mindset is critical to long-term investing success as well:
Keep in mind that your potential to experience emotional pain comes from the way you define and interpret the information you’re exposed to. When you adopt these five truths, your expectations will always be in line with the psychological realities of the market environment. With the appropriate expectations, you will eliminate your potential to define and interpret market information as either painful or threatening, and you thereby effectively neutralize the emotional risk of trading.
The five truths he’s refers to are:
- Anything can happen.
- You don’t need to know what is going to happen next in order to make money.
- There is a random distribution between wins and losses for any given set of variables that define an edge.
- An edge is nothing more than an indication of a higher probability of one thing happening over another.
- Every moment in the market is unique.