The Mental Strategies of Top Traders: The Psychological Determinants of Trading Success

4.13. THE PSYCHOLOGICAL DIMENSION

What differentiates expectational analysis and variant perceptions from the investigation of fundamental data alone is the ability a trader needs to discern psychological and sentimental factors that make stocks move beyond the conventional numbers. Instead of just considering the whats of the information, traders must also investigate the whys:

• Pattern recognition: Look for patterns in evaluating the value of data and making more accurate estimates.

• Seek out mispricings: Look for mispricings, disconnects, and other things that suggest that buying a company gives you a good shot at winning the bet in a reasonably well-defined time period.

• Pay attention to emotions: Recognize how much the market is based on irrational and emotional decisions and learn to appreciate these tendencies by reading the chart action as well as by assessing the quality of information from suppliers, distributors, and others in the food chain.

The best traders are continually upgrading their interview skills and their ability to separate the wheat from the chaff and the truth from hyperbole when they interact with managements. To become skillful in getting information on the business and the numbers, traders have to know how to communicate in the appropriate way and with whom to communicate. They need to know the right questions to ask, when to ask them, and how to ask them. They need to know how to identify or at least suspect when they are being lied to and how to adjust ...