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

Chapter 4. Thinking Outside the Box: The Importance of Ingenuity

Original creative ideas are innovative because no one has ever thought about them before. Those who develop such ideas are usually thinking in a different way than others. Consider Copernicus and how he said that the earth traveled around the sun, or Einstein when he introduced the Theory of Relativity. When these concepts were introduced, they were new and controversial. It took a while for everyone else to catch on.

Academic studies have shown that fundamental datapoints (earnings, corporate actions, etc.) explain roughly 30 percent of daily/weekly stock price variation. Given that fundamentals are only one of many factors that determine stock price, it is crucial to understand what other factors play a role in determining stock prices.

In order to make money in the markets, a trader needs to know something that other people don't know yet. He needs to be thinking ahead of the curve, to anticipate what is going to happen before there is evidence in the markets that it is going to happen and everyone starts to get on board with the same trading hypothesis. To do that, he has to understand something about the company and how it is functioning, how the particular industry is doing, what is going on in the economy, and a variety of other things. The more he knows, the more he can make a calculation about the likely target or trajectory the stock is going to follow. The more work he does, the more he is ahead of others ...