What is an intelligent trader?

Traders profit from short-term price fluctuations. The goal is to buy when our market reading indicates that prices are rising and sell when the rally has run its course. Alternatively, we can bet on a decrease and sell short when our analysis indicates a downtrend, then cover when the downtrend reaches its bottom. Although the principle is easy, putting it into practice is tough.

It’s difficult to become a good analyst, but even more difficult to become a successful trader. Beginners frequently believe they can generate money because they are intelligent, computer proficient, and have a track record of commercial success. You can buy a fast computer and even a backtested system from a vendor, but investing is like attempting to sit on a three-legged stool with two legs missing. Psychology and money management are the other two aspects.

It’s just as important to keep your mind in check as it is to analyze markets. Your personality has a significant impact on your perceptions, making it an important factor in your success or failure. Money management in your trading account is critical for surviving probable drawdowns and long-term success. To be successful, you must master all three: psychology, market analysis, and money management.

There are two main approaches to profiting from crowd behavior. The first is momentum trading—buy when a ripple starts running through the crowd, sending the market higher, and sell when that ripple starts losing speed. It is a challenge to identify a new trend while it’s still young. As the trend speeds up and the crowd becomes exuberant, amateurs fall in love with their positions. Professionals remain calm and monitor the trend’s speed. As soon as they find that the crowd is returning to its nor­mal sleepiness, they take profits without waiting for a reversal.

The other method is the countertrend strategy. It involves betting against the deviations and for a return to normalcy. Countertrend traders sell short when an upside breakout starts running out of speed and cover when a downtrend starts petering out. Beginners love to trade against trends (“let’s buy, this market can’t go any lower!”), but most get impaled on a price spike that fails to reverse. A man who likes peeing against the wind has no right to complain about his cleaning bills. Professionals can trade against trends only because they are ready to run at the first sign of trouble. Before you bet on a reversal, be sure your exit strategy and money management are fine-tuned.

Momentum traders and countertrend traders capitalize on two oppo­site aspects of crowd behavior. Before you put on a trade, be sure to know whether you’re investing, momentum trading, or countertrend trading. Once you’ve entered a trade, manage it as planned! Don’t change your tactics in the midst of trade because then you’ll con­tribute to the winners’ welfare fund.

Amateurs keep thinking about what trades to get into, while professionals spend just as much time figuring out their exits. They also focus on money management, calculating what size positions they can afford under current market conditions, whether to pyramid when to take partial profits, and so on. They also spend a great deal of time keep­ing good records of their trades.