Which Market Wizard is the Best Role Model?
This article originally appeared in the Ask Jack column on Bidnessetc.com. Each article answered a question submitted by readers.
You’ve interviewed many great traders. I noticed that these traders have widely different, even contradictory, trading styles. Which of the traders you interviewed do you believe provides the best role model for an aspiring trader?
This is a question that has no answer—at least no answer that is broadly applicable. The answer is critically dependent on the person asking the question. I could no more advise you on which trader might be the best role model for you than I could tell you what size suit you should get without having ever met you.
Many aspiring traders believe that trading success is all about the methodology. This assumption reflects only a partial truth. Yes, an effective methodology is a critical element to trading success; shoot-from-the hip-traders rarely succeed. But while the methodology is very important, the key point is that it has to be the right methodology for you. If you were trained by a highly successful trader who used a methodology that was a poor fit for your beliefs and personality, you would likely still fail.
There are many dimensions in which methodologies can differ, and in each case, the individual trader has to discover which of the possible alternatives feels like the right fit. “Fit” is an appropriate word because for a methodology to be successful for a trader, it has to fit precisely, just like a suit has to fit exactly in order to look good. The following are some of the key dimensions and alternatives that need to be defined:
- Analytic Style: Will your approach be based on fundamental analysis or technical analysis or a combination of the two?
- Style Subcategories: Each broad style would have multiple subcategories (e.g., technical analysis could be further broken down to trend-following, counter-trend and pattern recognition).
- Decision Process: Will trade decisions be systematic or discretionary or a combination of the two (discretionary based on systematic inputs)?
- Markets Traded: A partial list of choices would include equities, futures, FX and options, or any combination of these.
- Timeframe: The average trade duration could range from intraday to over a year.
- Degree of Diversification: Choices can range from a single market to a concentrated portfolio to a broadly diversified portfolio.
- Degree of Risk: What percent of AUM will you risk on any trade?
- Risk Management Method: How will you control risk? For example, will you use stops or not? Will you have loss cutoff points to stop trading (at least temporarily)? An so on.
The combination of the specific alternatives selected for each of these trading dimensions would define the specific methodology, and there would literally be at least hundreds of thousands of methodologies based on the possible combinations of just the alternatives listed above. What are the odds of finding a trader whose methodology will closely fit the ideal approach for you? And it is important to stress that for any of the alternatives listed above, there is no right approach. For example, neither fundamental analysis nor technical analysis is inherently the right or even better approach. For some traders, fundamental analysis will be very effective and technical analysis will be worthless, while for other traders, the exact reverse will be true.
Each trader must discover which alternative in each trading dimension resonates and feels like it provides the right fit. I use the word “discover” because the characteristics of the right methodology will not be obvious at the onset. For example, you may start out thinking that fundamental analysis is the approach you want to use and then discover technical analysis is a better fit or vice versa. You won’t know until you do some exploration and experimentation with each approach. To use an analogy, some people love running; some people hate running. You won’t necessarily know which group you are in until you actually try running.
I long ago discovered that when I met readers of my Market Wizards books and they asked, “Do you know which was my favorite chapter?” I had no idea as to what the answer would be because it always seemed to be another chapter. The reason is that each reader identified most closely to the trading style and philosophy of a specific trader—a preference that differed for each person. The bottom line is that the trader that provides the best role model really depends on you.
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