Theory on Investing/Trading Success

I am in a happy situation. With no positions held overnight, I slept well and am relaxed. My system does not compel me to do anything immediately. Only if Nifty trades above 5131 will I be going long. In all likelihood I will not have to do a trade today.

Yesterday DAX triggered my sell levels and then has moved back up. Luckily S&P did not do that and has continued to surge strongly. The uptrend seems intact in S&P and we could see that translate into an uptrend on the Nifty too.

Coming to the point of the note, there are various styles of investing ranging from contrarian to growth to value to momentum. Similarly in trading too one could be a trend follower, swing trader or a trader who prefers to play the reversal to mean kind of stories. Their proponents have examples to give us of great successes in their chosen methodology of trading/investing. Each of the proponents of the various systems try and explain the successes by chosing to site the advantages of their methodology over other methods of investing/trading. My feeling for some time has been that the success of the trader has less to do with the system itself and more to do with the trader. I am not sure what determines their success but I do have a theory.

My theory of success in trading/investing states that "A traders success is directly proportional to three things" One to the simplicity of the proposition of his system. Contrarian investing has a simple proposition for example. Buy when everybody else is selling and sell when all around are euphoric and buying. Two it is directly proportional to the divergence from normal human behavior demanded by the system. Again in the case of contrarian investing while the proposition is simple, implementing it is very difficult since the method demands that a trader set aside all his learned traits and overcome fear and BUY when the environment around is fearful and pessimistic. The implementation of the proposition basically demands a behavior from the trader which is in divergence from his natural tendencies. This divergence that is demanded is important because it ensures that this method of investing/trading cannot be duplicated easily by others. It ensures that the efficacy of the method is not lost simply because everybody follows it. Finally his success is directly proportional to his ability to handle this divergence without stressing himself out. This is a given. When we do something that does not come naturally to us, the dissonance is bound to create stress. Ability to handle this stress without affecting the implementation of the chosen methodology is the key to success.

I am pretty certain that all the successes like Warren Buffet in Value Investing or Ed Seykota in Trend following have been able to internalise their methodologies and have been able to alter their behavorial traits to match the traits required by their system. This ensures faultless implementation and low levels of stress.                                                                   Having said all this, let me remind you that I will go long above 5131 today.