Wisdom

​It would be wonderful if there were a foolproof and valid instruction manual for how to trade the markets profitably, a cookbook of sorts where you merely follow the steps and you are successful. For decades, traders have tried to find recipes for financial success. For some, the Holy Grail comes from the latest trading guru. For others, it may be a new software program. As appealing as a trading cookbook may sound, however, countless professional traders know that there are no quick and easy methods for successful trading. A method may work under some market conditions and not others. And when it comes to conventional wisdom, sometimes it is true and sometimes it is not. A popular saying that captures the fallible nature of conventional wisdom is, "history only repeats itself in the markets when it does." That is, you can study old charts and discover a historical set of events that unfolded in the past that suggests a high chance of a profitable trading setup. For example, this can often be done with seasonal spreads.

What are your favorite tidbits of conventional wisdom? Some people say avoid the market open, but other traders thrive on the chaos and uncertainty that occurs during the open. Other people warn to avoid trading right before an earnings report, but other traders make profits anticipating what the news might be. Still other traders like the idea of multiple regression formulae that will predict a trend. Sure, if you have a large enough dataset and want to make very long-term forecasts, it may work, but probably only for large institutions. In the end, conventional wisdom is right some of the time, but at the same time, it is wrong some of the time.

I'm not saying to throw out all conventional wisdom. Even though it may not be in your best interest at times, it makes sense to take conventional wisdom into account. For example, it makes good sense to control risks, and it is always vital to make sure that you can survive a trade should it be a loser. Similarly, it's always valuable to have a trading plan and to follow it. If you have a map to guide you, then you will be more likely to follow it.

Why do we have a strong need to seek out conventional wisdom and follow it? Throughout our lives we have been taught that those people who play by the rules tend to succeed. If you "do the right thing," whatever that is, you will be successful. There is a sense of security in believing that if you complete steps A, B, and C, then D will happen. It is all so straightforward, but life doesn't always work that way. And in a profession like trading, where relatively few make a fortune, it is rarely true. The steps to follow are not clear, and since market conditions are in constant flux, the "rules" seem to change constantly. But don't despair. If you have confidence in your ability to win, work hard, gain a wealth of experience and persist, you'll master the markets and make the profits you are looking for.