“The stock market is a device for transferring money from the impatient to the patient.”- Warren Buffet
In this blog, I will talk about that rather apt comment by Mr Buffett and how it is relevant not only to the long term fundamental trader but, surprisingly to some, the day trader too.
I will also take a look at how the amount we place on each trade can often be an oxymoron.
Bob Volman says “The more a trader adheres to a strict set of entry and exit rules, the less likely they are to fall prey to challenges of the emotional kind”. From my own experience, I know the importance of those words. That is why many trading seminars can be dangerous for a traders bottom line.
Some such events provide a plethora of trading strategies, and this leaves a massive door open to an individuals interpretation and intuition. Or, in other words, a traders impatience. Successful traders refer to working without the need for a reward – if we want the money, it will be elusive for us. What keeps us emotionally separate to the financial outcome as much as is humanly possible is holding to an understood, extremely well practised, strategy. Within that strategy, we ought also to know without question where our boundaries are for an aggressive take and at what point we skip (but not through fear) a set-up even though we have waited for the longest time. That is a mature, unemotional, trader at work. Our success is not necessarily the trading system we adopt (or create), but how we apply it. An obvious consideration maybe, but probably the most significant reason that prevents a seasoned ‘breakeven’ trader from graduating.
The amount traded.
Connected to our thoughts above is the amount we place on each trade. At one extreme we have a demo account with no real risk attached, and at the other, we have an amount that is beyond reasonableness for our consideration. My blog ‘conservative breakout trading‘ covers this in mathematical detail. What I want to marry here is patience and the risk we give to each bet. Of course, it would be foolishness of the highest order to trade large within a strategic vacuum or where a strategy has not been tested, practised and, therefore, approved. However, once at this point in our trading journey, if we remain a light trader (that is a trading risk significantly below our potential), then we most certainly invite impatient trades back into the fold with its inevitable cousins, uncertainty and fear. A proficient day trader who regularly compounds their trade amount (say, to match a 2 per cent risk to account size but not beyond the margin requirements) have a trade approach that is, well, professional.