Here are 5 lessons learned for me as a trader (even i don’t practice value investing) after watching Becoming Warren Buffett documentary.
Circle of Competence
Having experienced and practised many technical analysis methods range from technical indicators (such as MA, MACD, RSI, Stochastics, CCI, etc…), blackbox system (paid proprietary system), pattern trading (such as double bottom, head & shoulders, cup & handle patterns etc…) with Fibonacci retracement/expansion, eventually I found that Wyckoff method suits me well in terms of the results and practicality, after years of learning and practice.
My job as a trader is to assess the supply and demand based on the interpretation of the volume and the price followed by using the right tactic for different directional bias. Ultimately, we need to judge the market by its own action so we can act accordingly.
So, find a trading method that suits you, learn, practise and master it. Avoid system hopping. This is one way to find the circle of competence.
Look for wonderful companies at fair prices rather than fair companies at wonderful prices
Despite this is how Charlie Munger influenced Warren Buffett in stock pick for investing, this is also very relevant in trading. Let me explain below:
When we buy stock, apart from being in an up trending environment, relative strength is very important. Many people think that every one will profit from the market if they buy any stock during the bull run. What they tend to overlook is if you buy the stock that outperform the market, you will profit a lot more.
So, only buy (long) stocks that show stronger relative strength than the market and sell (short) stocks that are weaker than the market. This is the way to beat the market and to scale up in the trading business.
Get rich by having patience
Compounding not only works for investing, but also in trading.
Some people insist that they would like to trade for a living so that they can have their own lifestyle and live wherever they want, yet they trade like they want to retire next few months or a year by taking excessive risk.
- For investing, if you can achieve Compounded Annual Growth Rate (CAGR) of 20%, it will take you 26 years to grow initial capital of $10000 to $1.1million.
- For day trading, if you can achieve CAGR of 5% every month, it will take you about 8 years to grow initial capital of $10000 to $1.1million.
- For swing trading, from 10k to a million dollar might take some where between 8-26 years with a feasible and realistic CAGR.
Of course, there are other variations, assumptions and limitations.
So, patience is required too if you want to get rich via trading.
Find a job you would take if you didn’t need a job to live
Unless you are truly passionate about trading, being a full time trader can be boring. A profitable trader generally look for the same setup every day and find ways to optimize his/her trade setup for various trading environment (else just no action, no trade).
When you reach a point you don’t need to trade to make money, will you still be trading? What will you do instead?
So, find your passion and start live your life to the fullness every day.
Achieve balance in your life