The Key to Longevity and Consistency in Trading the Markets

Why Trading is So Hard

As a professional full time trader for over 25 years, I've seen a lot of people come and go from this business and very few that have longevity. I think there are 2 fundamental differences that separate those that have longevity from those that do not.

The first would be Adaptability.

You must have a very flexible attitude on Wall St. because it's constantly changing. Too many people study the markets for months/years and then try and put the market into a box. That works for a little while but then it doesn't, then what do they do? Well, they may go back and try to tweak their boxes and that may work again for awhile but then it doesn't again. This is a decent approach but it is very slow and cumbersome and few can do this fast enough to survive, but it's a critical component if you're going to at least have a shot at longevity.

The second and far more important ingredient in my opinion is Education.

Now when I say Education, I don't mean school smarts. I mean a very specific type of education. The education of CHAOS and the how and why the market behaves the way it does.

A lot of very smart people come to this business and they try and apply what worked for them in other areas of life to the chaos of the markets and this is usually a disaster. Why? Well in most other parts of life we are given STRUCTURE and we are told that everything has rules and that in order to be successful and learn things, we must follow the structure and obey the rules. Well in the stock market, nothing could be further from the truth.

Every morning all across Wall St., teams of very smart people gather together and try and figure out a very complex process to make an educated guess on the direction of the masses. What does this actually mean though?

First, let's start off with the basics of what the stock market really is. The stock market is nothing more than an auction house, that's it... that's all. Each day from all around the world institutions, corporations, hedge funds, mutual funds and private individual people like you and I all gather into the electronic auction house and we buy or sell at prices we believe are either low or high. This is critical thinking and you must understand this.

This is why so many people fail because they are approaching the markets incorrectly by looking for patterns in chaos. And why is it chaos you ask? Well, let me give you a very simple example of what I mean. Try and imagine a small auction house with only 5 people in it, for the sake of simplicity we will number these people 1 - 5.

Up on the auction block is ABC Corporation (10,000 shares outstanding). A struggling button making company that made net $100,000 last year, has debt of $100,000 but is located on a prime piece of real estate that it owns and is worth over $200,000. This is a very simple scenario but let's see what will happen when only 5 people try and figure out what it's worth that day at the auction house.

Person 1 - Is in the button business and he wants to expand his business and buy the company because he has existing orders for millions of buttons that will bring in over $300,000 next year alone. He values the company (to him) for $50 per share.

Person 2 - Is in the real estate business and he wants to buy this company and sell off all its assets and build a strip mall on the location. He figures that if he can get the company for anywhere between $30 - $40 per share he can make out well.

Person 3 - Is a technical analyst and has studied this company's charts and sees a huge potential here and sees a head and shoulders pattern, as well as, a target price on this stock of around $35 per share.

Person 4 - Is just a wealthy businessman that has to take a capital gains loss to offset his huge profits he made earlier in the year and wants to buy the company for $40 per share and let it fall to $5 then sell it off.

Person 5 - Is the company's 50-year-old founder and she loves the company and the button business. She wants to save it and all her employees's jobs. She has gone to her friends and she has raised enough money to keep the company in her control between the price level of $20 - $45.

Now as you can see we have a very simplified  situation here. We have 5 different people with 5 different viewpoints and valuations. The auction process begins and the bidding starts.

Person 1 bids $21 and the auctioneer says going once, twice and Person 3 bids $22 and the auctioneer does his thing. This goes on and on all day as these 5 people all try and get the best price they can, keeping in mind their own personal outcomes. Now during the auction we get news that Taiwan has just entered the button business and is opening 2 huge plants. This immediately effects the valuations of all the participants doesn't it? Then we get news that a very rich Taiwanese investor is entering the auction and he wants to add this to his portfolio and compete with the 2 other new plants opening in Taiwan.  Then all of a sudden we hear that the U.S. economy just had a very disappointing retail sales report and buttons aren't going to be as popular as we thought earlier today. You can see where I am going with all of this right?

Each day thousands of very different people all having very different agenda's for what they believe a stock is worth at that specific moment in time. The problem is that the next moment there will be a thousand more people with very different opinions and agenda's. THE MARKET IS JUST AN AUCTION HOUSE AND THE PARTICIPANTS AND VALUATIONS  ARE CONSTANTLY CHANGING. Once you begin to view the market from this perspective then you can start to understand the importance of thinking in terms of GENERALITIES.

When we think in terms of generalities we will not be stuck to our beliefs and ideas of what a stock price is worth and we will begin to adapt and change with the market. It's a dance with chaos and the only way to dance with chaos is to educate yourself from the perspective of what it really is.

I have learned to think of the market in terms of generalities and I have developed a set of tools to help me flow with the auction process and show me the general conditions of the market at all times. This is the goal you should be aiming for.

Sam Patterson has over 20 years of experience in day trading and has worked as both a broker and an analyst. As an apprentice stock broker, Patterson experienced first-hand the stock market crash of 1987. Seeing how easy it was for fortunes to get wiped out overnight, he left the brokerage firm and began day trading for himself. Patterson's extensive experience on the "front-lines", gives him the rare ability to teach and share his technical analysis with others. Patterson resides in Canada and is currently an individual day trader. If you are interested in being mentored by Sam, contact him directly at sptrader@rogers.com.