Know Yourself, Know Your Setup

Who are you? What are your strengths and what are your weaknesses? Do you thrive amidst chaos or require regimentation and stability? In trading, the answers to these questions are far more important than any setup you can devise. At its core, trading is a game of psychology, and no amount of reading, no computerized back-testing, no advanced seminar work will produce long-term success if your trading style is in conflict with your basic personality. Contrary to popular belief, successful traders do not change their approaches to adjust to the market but rather find market environments that best suit their inherent strengths. That's why in books like Jack D. Schwager's Market Wizards (New York Institute of Finance, 1989; HarperBusiness, 1993) you will find very successful traders following diametrically opposite approaches to the market and often dispensing what appears to be contradictory advice. In fact, it's not at all inconceivable to imagine two market wizards taking opposite sides of the same trade yet both walking away with a profit.

To market novices this idea may seem completely illogical. In most businesses we are taught that there is always an optimal way of doing things, that certain processes will be far superior to others. Clearly that's the case with engineering, where scientific rules of optimization and refinement apply to everything from car production to bridge building. Financial markets, however, are emotional mechanisms, ...

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