What separates champions from everybody else? The interesting part (to us) is that champion traders have the same characteristics as champion athletes. What should we be learning from these teams and players?
1) The Power of Belief - Do you ever notice how good teams can go on a cold streak, while even mediocre teams can get on a roll? Why do these streaks happen? I believe it has to do with the feedback mechanism similar to how stocks trend: when the ball is going in the bucket, you believe more strongly that the next one will go in too. When the rim seems to have a lid on it and shots aren't made, this breeds a doubt or tentativeness that takes the shooter out of the zone and increases the odds that the next shot won't be a score. As a trader or investor, I'm sure you join me in having experienced the feelings of both hot streaks and cold streaks. But both can be dangerous to you due to the swings in emotions. When traders are hot, they can tend to overcommit their capital after a series of wins only to give much of the profits back too quickly. Or when traders are cold, they tend to move to the sidelines out of doubt and fear, and often watch in disbelief as the trade they didn't make proves to be a big winner. What would happen if you could take the mindset of confidence you feel when things are going well, and have that same level of belief and self-esteem consistently? If you can apply a sound trading approach with confidence and without emotion, you will be able to follow your rules when most other traders are getting blown out by their emotions.
2) Winners Are Defined by Survival - The reality is that some days will be better than others. The key to success is not just profiting from the good days, but it is also about not blowing up on the bad days. When a good team is not hitting its shots on offense, it makes up for that by playing better defense. For traders, this means you must keep your stops reasonably tight so that you can come back to play another day. It also means that you should not react passively, but must resolve with determination to control what you can instead of feeling resigned and out of control. This will allow you to survive the tough days to stay in the game for the profit days to follow.
3) Winning Teams Have Great Coaches - Sure, some teams have more skill as a sum of the individual parts. But the teams that advance have outstanding coaches who know how to take the individual pieces and make a better team. As a trader, you want to identify your unique strengths as well as weaknesses. Consider getting a trading coach or investing in resources that can help you maximize your unique combination of trading skills and allow you to win against any competition or any market environment.
4) Bet Against the Obvious - I've seen too many examples where the expected best team did not win it all. The obvious pick is more and more likely not to go all the way because expectations run too high. This puts pressure on the top team while also increasing the desire of the underdog to pull the great upset. Relating this to trading, you have to be careful that the trade you are making is not too obvious already. If it is widely expected that good news is coming, then most traders have already reacted by buying that stock in front of good news. This reduces the future upside while at the same time increasing risk in the position upon even a mild disappointment. Remember that the stock market is a supply and demand game, and if the demand dries up as everyone is already in the market, then you have more risk of selling once the news comes out that you do of any new buying. In sports there are underdogs. In trading there are unlikely trades. And in sports as well as trading, anything is possible.
Price Headley is the founder and chief analyst of BigTrends.com.