What Separates Successful Daytraders From The Crowd?

At the risk of extreme oversimplification, we can understand how some daytraders have stayed profitable during the bear market by classifying them into two categories. 

• One group learned how to daytrade during a time when it was easiest. They relied upon systems and strategies, but with very little understanding to go along with it. The charts I showed you under the heading of "The Way We Were" exemplify that environment. During such times, you found a lot of traders with fantastic track records extending over the course of two or three years. If you saw that, you'd think they were geniuses. Quite a few of these traders lost all their money and/or went out of business not long after the bull market ended.
  
  This first group is what I'd call the Russian Roulette traders. They made a lot of money without really understanding what they were doing, or the true nature of the markets. Their methodologies blew up when the market environment changed. The market environment, however, in the context of the past 100 years (and even the past 50 years), is nothing unusual.
  
  
• In the other group, you have traders who have a deep understanding of  their methodologies, and of the markets. They performed well during the bull market, quickly adapted and continue to perform well during the challenging environment of the bear market.
  
  The second group is what I'd call the traders with a "dental attitude." They methodically go into work every day and, like dentists, whip out their tools and go to work. They understand how their tools work, and they have different tools that are applicable to different situations. They do not merely observe cause and effect, they also understand the relationship between cause and effect. They are students of market history and have grasped not only intraday patterns, but fundamentals, macroeconomics, and market history. They know when to switch tools based upon the environment they are operating in. As a result of all of this, their careers will span decades.

The traders whose strategies are profiled in this week's topic performed well during the bull market, and they have continued to perform well during the bear market. These traders have a level of understanding that you should model.

Going forward, shun the black box. Seek to understand and be humble.

Your Instructors