When I sit down to write for TraderPlanet, I typically mull over things that have occurred the same day in my coaching practice. It seems the fresher the experience, the more easily it can be milked for a few drops of insight.
Tonight I had the pleasure of working with an aspiring futures trader, a corporate pilot by day who has dreams of retiring from flying and leveraging his navigational abilities to become a successful private trader. This is indeed a dream shared by many.
What’s interesting and impressive is that he quickly found a way to trade using the simplest of tools (a moving average) and because he is disciplined in applying it, he has enjoyed a significant winning streak. Was it just beginner’s luck? I don’t think so.
What made this fellow successful is that by staying with this simple tool he was able to avoid the Prediction Trap.
The Prediction Trap is a mindset focused on what the market is going to do next. It’s a trap because the market can do anything at any time. That’s the nature of a complex dynamic system. Like a card counter in Las Vegas, to be successful in trading you don’t need to know what comes next; you only need to know when you have an edge.
An ‘edge’ is a defined profit opportunity. A durable edge is a simple edge. Without a core of simplicity, the randomness in the market will degrade our edge and seduce us into prediction.
This client happened to define opportunity in terms of mean reversion. This concept made intuitive sense to him, even though he did not know the technical term. Mean reversion wasn’t something he was taught; it was something he observed.
It’s not enough to have an edge, we need to own it. This fellow owned his edge from the beginning because it wasn’t merely something he read about. The market behavior he recognized was obvious to him and consequently, he could trust his method of exploiting it. This enabled him to trade with confidence even though he had no idea what the market was going to do next.
Like figures in a cloud, markets produce an infinite variety of patterns, most of which are meaningless.
If you stare long enough at the market, however, something essential about its behavior will be revealed to you. Build your method around that insight and keep it simple, untainted by prediction, and trade it with discipline.
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