Know Yourself to Be a Better Trader

The most important thing to know about the stock market is that there is no approach to investing or trading that is inherently superior. What works best will depend not only on market conditions but on the way you think, feel, and act. Success in the market is highly dependent on emotions, logic, and other traits that are highly personal.

You would never know that there is more than one way to approach the market if you listen to traditional market media. The message preached is that you should only buy and hold big-cap stocks and think like Warren Buffett. The first thing that anyone is taught about the stock market is to buy low, sell high, and hold good stocks for the long term. Anyone who varies from that formula is unlikely to be successful.

In recent years, a new group of market players has emerged, primarily driven by social media and cryptocurrencies. They don’t adhere to the traditional view of the market, instead viewing the stock market as a form of gambling. Fundamentals, valuation, and the many other issues covered in the business media are meaningless because this form of investing is just betting on price movement. This approach is often a form of entertainment, much like sports gambling.

Everyone views trading, investing, and the market in different ways. There is no right way or wrong way to think about it. What is essential is to use your perceptions, logic, and emotion to craft an approach that works for you. Trading junk penny stocks is just as valid as buying Apple  (AAPL)  for the long term, if you have developed a logical, consistent approach that works for you.

Finding your unique approach to the market is significant, because it provides clarity about what steps you should take. If you feel you are best suited for a long-term approach, then don’t get distracted by social media chatter and all the short-term noise. If you feel you have the temperament and skills to be an aggressive short-term trader, then focus on that and don’t let trades turn into investments.

One of the most significant problems that market players face in developing a style is that no style works in all markets. There will be periods when your approach yields subpar results, but if you continually try to reinvent what you do, the likelihood is that you will never truly be in tune with the market.

The key to style is to be in sync with a particular market environment. At times, the gains will roll in surprisingly fast, but then there will be times when nothing seems to work. That doesn’t mean you have a poor style. It means that market conditions are shifting. They will constantly shift, and it is unrealistic to expect to maintain the same level of gains steadily for an extended period.

The first step in determining your individual approach to the market is to engage in some self-reflection. How much time do you want to devote to the stock market? Do you find trading and investing to be interesting and entertaining? Do you want to look at the market every day? How much research and strategic thinking are you willing to do? Are you aware of your emotional reactions as you make and lose money? Do you panic easily or become too greedy at the wrong times? What levels of risk are you comfortable with? How much capital are you using?

You have to know yourself and your inclinations before you can determine what works for you. Trying to be a short-term trader when you aren’t willing to devote adequate time to it is a recipe for disaster.

Personally, I greatly enjoy the hunt for new ideas and have some level of skill at picking stocks. To make that work, however, I have to have a trading approach that deals with the high levels of risk associated with smaller, less-known stocks that have high levels of volatility. I incline to be aggressive and take on higher levels of risk because I feel that my research and trading discipline will help protect me from mistakes. I love what I do and am motivated to work hard at it.

The stock market can produce a lifelong income for you, but it requires that you find a style and approach that is consistent with your emotions, personality, and skill set. Stay aware of the fact, and you are on the road to success.

At the time of publication, Rev Shark had no positions in any securities mentioned.