The most profitable trading strategies are innovative. You cannot merely follow the crowd or think conventionally if you plan to make profits in market after market. You have to sift through information on your own, and in the end, you must trust your instincts and go your own way. It takes courage, willingness to take risks, and is not for the faint of heart. It isn’t for everyone. Make sure it is right for you.
Market conditions are continually changing. You can’t expect to simply follow the masses and hope that it will always work. Instead of following the herd, buying when everyone else is buying and selling when everyone else is selling, you have to anticipate the crowd. You have to be a leader rather than a follower. That often means buying when everyone else is selling, and selling when everyone else is buying. In other words, buy on weakness, and sell on strength.
How does this work? Assume that prices move in cycles. For mere illustrative purposes, pretend that market cycles, or waves, go down at the open at the middle of the week, up at the close of the following day, and open down on the next day. If history was to repeat itself, and unfortunately it rarely does, you could buy low, wait for the price to go up, and sell for a sure profit. If the cycle followed a reliable, consistent pattern, you wouldn’t need to be a rugged individualist, or know how to use your intuition. You would know exactly what would happen and when, and trading would be simply a matter of waiting for the right moment and buying or selling, depending on the specific point during the cycle. But history only repeats itself when it does; the rest of the time it does not, and no one knows for certain when it will or will not repeat. That’s what makes trading a challenge. You simply don’t know exactly where or when the cycle will repeat. In the end, it’s just a matter of probabilities. You can’t wait for solid confirmation from the herd and merely follow them. The future is never certain, and so that’s where thinking independently, like a rugged individualist is relevant.
In the final analysis, you only have a cache of fallible trading strategies and your own intuition to rely on. It helps if you are a natural, rugged individualist, a person who isn’t used to looking toward others to see what to do next. A rugged individualist is familiar with taking chances, and using gut instincts to make decisions. And that’s all trading is — making a good guess, taking a chance, and having the courage to follow your convictions so that you manage the trade to a profitable outcome.
Having the flexibility to follow the crowd when it is advantageous and to go against the crowd is not difficult. You can be neither a conformist who feels safety in numbers, nor a deviant who likes to go against prevailing opinion. The winning trader truly thinks independently and trusts his or her own instincts. Cultivating these talents is necessary to achieve lasting profitability. How can it be done?
The first step is to assess your own personality. Are you a conformist, rule follower or a deviant, rule breaker? Neither extreme is very adaptive. It’s useful to know where you stand on the continuum and to realize that you must develop skills characteristic of the other end. Rule followers must learn to deal with uncertainty and risk, for example. Rule breakers, in contrast, must learn discipline and self-restraint. In other words, they must learn how to follow conventional wisdom (when it’s actually right).
Second, you must gain a wealth of experience, and over time learn to trade in different market climates, and at different points during the ebb and flow of market prices. Many traders know how to trade the trend, and that’s a good start. But seasoned traders also know how to anticipate a turning point and capitalize on the masses’ herd mentality, which compels them to stay with the trend even when it is about to change.
Some people are natural individualists. Other people have to work at it. But regardless of your natural inclination, it is vital that you find the courage to follow your own convictions. The winning trader is a rugged individualist. If you can find the strength to go your own way, you can join the league of winning traders.