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1-Page Summary of Trading

Fundamental vs. Technical Analysis

Up until the late 1970s, fundamental analysis was the most common way to trade stocks. Fundamental analysis is about creating mathematical models that incorporate all of the variables that might affect supply and demand for a particular stock or commodity.

Technical analysis has been used by professional traders for a while now. This is because it’s more effective than other forms of analysis and allows them to make better predictions about the market. Technical analysts look for patterns in historical data and then use those patterns to predict future behavior.

Mental Analysis

Technical analysis is a way to analyze the market, but it isn’t perfect. When everyone uses technical analysis, we would expect that they’d all get rich. In fact, technical analysts tend to lose money because the market is zero-sum: for every dollar made by one trader, another lost on their trades. Winners are able to win because of their mental attitude and ability to overcome losses.

A good trader is one who accepts the uncertainty of the market and doesn’t let a losing trade get to him. He keeps going without looking back even if he’s not making money. The average trader, on the other hand, has an unhealthy competitive attitude towards trading that makes him want to be right all the time. This leads to holding onto losing trades in hopes they’ll turn around and cashing out winners prematurely, which ultimately makes you lose more than win.

Discipline and Focus

Discipline and focus are the keys to success. The defining characteristic of consistent winners is their mind-set. They have the discipline to remain focused on the big picture, which makes them immune from common fears that plague most traders and they do not fall prey to trading errors as a result.

Trading is risky. The nature of trading requires us to be prepared for failure and loss, but that doesn’t mean we should approach our trades with a negative attitude. We can do this by understanding how the paradoxes inherent in trading affect our decisions and actions.

Does this mean that when you trade, you’re a risk taker? Is it true that the more risks you take, the greater your chances of success? No. This is one of the fundamental paradoxes in trading: believing that taking risks makes you a risk-taker. It’s not true at all. To be a risk-taker means accepting the consequences of those risks and being able to exit losing trades without any emotional pain whatsoever.

Transcending Fear

The difference between consistent winners and losers is that the winners are not afraid. They have a flexible attitude toward trading, which allows them to listen to what the market is telling them while moving in and out of trades without being reckless. Their only concern is their balance sheet at the end of each day.

On the other hand, average traders are reckless when they’re winning and fearful when they’re losing. When things are going well, they become overly confident and take too many risks that can lead to significant losses. Then, after a big loss occurs, their confidence is shattered and replaced by fear of taking more risks in the future.

Trading is a tough business. There are many fears that can paralyze you and keep you from making good trading decisions. You fear being wrong, losing money, missing out on opportunities or leaving money on the table. The source of these fears is your attitude towards life in general and not just about the market itself.

Consider the example of a person who was bitten by a dog as a child. Because of that, he has developed an irrational fear of dogs. However, all dogs are not like the one that bit him when he was young and this fear is keeping him from experiencing other possibilities in life. It’s possible to have positive interactions with dogs if you don’t let your fears stop you from doing so.