Preparation breeds trading success

Sometimes it is the simple things in life that bring us the most success. People tend to think that great traders have a secret something – a special ability to see things that others cannot, or a magical, complex strategy that never loses. Other people come to life-changing realisations that successful traders actually have very simple strategies, but possess a great amount of discipline. They have the ability to actually stick to the simple rules that win over time.

We put so much energy into finding the perfect system, learning all there is to learn about all sorts of technical analysis, or automating our trading systems to substitute for self-discipline. These pursuits however, are often fruitless. Although I stand by technical analysis and discipline, and believe that they give the trader an edge, they alone cannot turn a losing trader into a winning trader. I cannot stress enough the importance of discipline. I’ve lost count of the number of times I’ve ended so red it’s ugly because I lacked discipline. But that’s not enough.

There is another piece to this puzzle that few talk about: preparation. Simple preparation breeds success. It seems obvious, doesn’t it? Yet so few of us spend time on preparation. We tend to react to things as they happen, but how often do we go out there and prepare for what might happen?

A good example is perhaps the recent Tencent results. We all know that Naspers has a big holding in Tencent and therefore the Tencent results will have a meaningful impact on the Naspers share price.

Now even though we cannot predict the results, we can familiarise ourselves with the expectation for the earnings release. We can ask around for research and make use of the many free resources there are out there, like Google Finance or investing.com. Once we know what the expectations are, we can go back in history and look at Naspers’ reactions in three scenarios. One being when the Tencent results were in line with expectations, and the other two being when Tencent either exceeded or disappointed expectations.

This takes time and effort, but once you understand how Naspers reacts to the different scenarios, you can start formulating a game plan. You still can’t predict the results, but you’ve thought about how you should respond in each possible scenario.

This is just one example of how we can think around this kind of stuff. The same applies with economic data like non-farm payrolls, GDP numbers, potentially radical policy changes or election outcomes. Our job is to brainstorm different scenarios and be prepared for a number of different outcomes. Then when there is an outcome, we already know what we are going to do, so we can just get on and do it.

So yes, the best traders keep it simple and have a ton of discipline, but they are also prepared and ready to react when things happen.

Happy trading!

Petri