Over the 17 years I've been involved in trading and working with all types of traders, I've seen four types of profitable discretionary traders.
The first type of profitable discretionary trader is the one who has a natural feel for the market. When you talk to one of these traders and ask them about their trading at some point you’ll hear them say something about ‘feeling the market was this way or that….’. These are traders who over the years have acquired a lot of implicit knowledge of the market and its participants. They understand what moves markets and they also have the required self-trust to act on their ideas and to protect themselves when they are wrong. Their personalities allow them to have the self-trust to know their limits and believe in their capabilities. We could call them a ‘natural born trader’; and there are very few of them. Although Jesse Livermore eventually blew-out, he’s an example of this rare type of natural trader.
The second type of profitable trader – or more accurately temporarily profitable – is the lucky trader; the trader who’s P&L is currently in an up swing but they’ll soon be negative. Often these traders either got lucky with a number of trades and can not replicate it, or they learned the habit of holding onto losing trades and they got lucky when those positions came back. This accounts for the largest number of “profitable traders” – but for these traders the money often leaves faster than it arrived.
The third type of profitable trader is the trader who although they are discretionary, they've developed some mechanical rules for entry and exits and are able to follow their rules most of the time. Many traders strive to be this kind of trader, but I've seen very few mechanical rule based discretionary traders succeed over the long haul. Consistently following mechanical entry/exit rules sounds appealing, and it requires a ton of will power; and most people don’t have that kind of will power, not to mention the fact that will power fatigue is a well-documented problem.
The fourth type of profitable trader is the one who has proactively developed their feel – the kind of feel the more experienced trader has developed over many years. This type of trader has acquired some market knowledge, they understand what moves markets, and they have proactively worked to understand their own personal vulnerabilities. This self-knowledge has allowed them to be able to distinguish between an impulse and an intuition… and they’ve developed enough self-trust to be able to act on their market feel. This is what I do with my clients.
What kind of trader are you?