A Solid Plan Equals A Winning Trade
James B. Rogers, Jr. started the Quantum Fund with legendary trader George Soros. In his "Market Wizards" interview, Mr. Rogers offers some sage advice, "Just don't do anything until you know you've got it right." Many times, traders are in a rush to make profits. And in this rush to win, they often trade without a detailed trading plan. But in principle Mr. Rogers' advice is as true today as when he gave his interview almost 20 years ago.
Mr. Rogers' losses early in his career taught him to acquire an accurate view of a trading setup before executing a trade. He says, "I learned quickly not to do anything unless you know what you are doing. I learned that it is better to do nothing and wait until you get a concept so right, and a price so right, that even if you are wrong, it is not going to hurt you." The price of a stock can be a function of what Mr. Rogers called "hysteria." A stock can be hyped up, greatly exceeding a reasonable estimate of its value. A stock price based on "hysteria" is likely to go down as fast as it went up. It's useful to know if you are trading hysteria. If you are, you may be vulnerable to the whims of the masses.
In his interview, Mr. Rogers preferred to call himself an "investor" rather than a "trader." Jack Schwager's definition of an "investor" is someone who only goes long, whereas a "trader" is willing to go long or short. And since Mr. Rogers was willing to go long or short, he fits the definition of a "trader" according to Jack Schwager. Without getting into a polemic discussion of the differences between traders and investors, there is a common stereotype that traders tend to trade by the seat of their pants. Rather than carefully plan a trade after a thorough consideration of all available information, they look at only a few indicators and execute a trade. There are times when this works well, but there is wisdom in Mr. Rogers' advice to make sure that you fully understand market conditions before you execute a trade. If you know what you are doing and why you are doing it, you will be more likely to make winning trades. If you know that the price is going up because of hype , for example, you may decide to trade a little differently. Rather than buy stocks that are hyped up, you will be better off selling the stocks you held previously that are hyped up, and wait for the hype to end before you buy them back, when they return to a reasonable price.
Whatever you do, however, it's vital to have a solid trading plan. If you can identify the factors that drive the price of a stock, you will be able to make prudent trading decisions. You will have a better intuitive feel for a trade, and will feel confident in your actions. Don't trade leisurely. Trading is a business and when you develop a good business plan and follow it, you will be more likely to profit.
