How to Think Like a Trader

04/20/2015 6:00 am EST

Focus: STRATEGIES

Quoting Bruce Kovner for support, Charles Kirk, of The Kirk Report, explains that the difference between a highly-skilled trader and a novice—in his opinion—can be spotted in a single conversation, not just based on what the trader says, but what he or she thinks.

“I assume that the price for a market on any given day is the correct price, then I try to figure out what changes are occurring that will alter that price. One of the jobs of a good trader is to imagine alternative scenarios.

I try to form many different mental pictures of what the world should be like and wait for one of them to be confirmed. You keep trying them one at a time. Inevitably, most of these pictures will turn out to be wrong—that is—only a few elements of the picture may prove correct. But then, all of a sudden, you will find that in one picture, nine out of ten elements click. That scenario then becomes your image of the world reality.”—Bruce Kovner

Mr. Kovner’s thinking process shows how an experienced and highly-skilled trader operates. In sum, he first assumes the market is always right, he thinks in terms of several future possible scenarios. He then closely watches the price action to confirm one such scenario out of many. Then he trades in line with that scenario when triggered. Not many traders and investors think or approach the markets in this way, but then again, not everyone is cut out to be considered by many to be one of the best traders in the world.

I can always tell when I meet an experienced and successful trader. All you have to do is ask them about their view of the market and if they talk in terms of certainties versus probabilities and only share one potential scenario rather than a possible few, you know right from the start they really have a lot to learn. The traders that can, as Bruce says, formulate various scenarios and then position themselves with an open—but prepared mind and a game plan to match—and then simply watch for the signs in the price action which scenario is correct, is one that is best positioned and prepared to see great success.

This is also why you should run, not walk, away from anyone who shares views about the market from only one narrow—always completely confident—perspective. While we all know from research, the herd always flocks to those “I am always right” type experts due to their own personal insecurities about their personal beliefs, portfolios, and strategies, doing so can really become an obstacle to your success. Instead, we all need to be developing potential scenarios on our own, figuring out game plans to match those scenarios to profit the most from them, and then let the market show which one is correct and trade accordingly.

Do that every day, every week, every month, every quarter and every year and it won’t be long until you see how important and helpful this thinking process and approach can be no matter what your strategy, time horizon, or objective.

By Charles Kirk, Trader and Blogger, The Kirk Report

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