Successful traders have to let go of the idea that they can look into the future. Incidentally, that applies not only to traders but also to investors.
Let's look at the difference between these two ways of generating returns: trading versus investing. At the same time, let's also try to figure out why people enjoy going to Las Vegas, even though they are often aware that they can't win there.
There are clear differences between a trader and an investor. An equity investor buys into a company for the long term. A classic example is Warren E. Buffett.
An investor is someone who is looking for enterprise value. Some make a distinction between value or growth investors, but in the context of this analysis, it makes no difference.
After all, growth also represents value -- value that a corporation draws from a strong brand, management or products.
So, investors will keep their holdings for several months or years and always act in a value-oriented way. They view their investments as equity interests.
What differentiates this approach from that of a trader? At first sight, one is inclined to think that the time horizon would be important.
Investing equals the long term, while trading equals the short term. There is a kernel of truth to this, but there certainly are long-term trading approaches, too, (trend-following) where one can remain positioned in one trade for several months.
In this respect, the distinguishing feature that remains is that traders try to exploit price fluctuations or volatility, while for investors, price fluctuations don't matter and they focus on the value of the investment or company.
So, exploiting price fluctuations and looking for volatility is what traders do. Therefore, trading is more likely short-term buying and selling of financial instruments with the aim of exploiting price fluctuations, and this definition says a lot about real trading.
For example, unlike an investor, it makes no difference to traders which stocks they actually trade. This may sound strange to those who aren't familiar with this business.
However, a real trader understands it. For example, looking at our moomoc sample portfolios, shows that the various trading models have generated a variety of different signals for many stocks.
Traders don't ask why the signals have been set off, and they don't know specifically which stocks will be traded. And even if they were to look them up, they would only see the ticker symbol and, frequently, they don't even know which companies are behind them.
Is it irresponsible not to know that? Are traders carefree gamblers who would be better off going to Vegas and playing there instead of on the stock market?
Here is a counter-question: Why do traders have to know which stocks they are trading? They only want to exploit price fluctuations.
How does it help trader if they know that, today, their strategy X is going long in a certain stock and their strategy Y is shorting other ones?
The statistics -- and trading is a statistical problem -- are telling us to just do it. And there are no follow-up questions, no interpreting and no hesitating.
Going to Vegas is really fun, but it is hard to win there because the statistically derived probability works against gamblers and in favor of the casinos.
People frequently don't understand the idea of not even knowing which stocks are being traded, but it makes no sense to worry about things that are irrelevant. Something that sounds haphazard to a novice is actually a very sophisticated plan.
This article is commentary by an independent contributor.