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Strategy Over Direction

"All you need to know about financial markets you learned in kindergarten."- Legendary Futures Trader Don Miller

So you've decided that you are interested in trading and/or investing your money in the stock market, where do you start? You start with erasing all of the mistruths that you have learned in business school, on the news, and from the folklore that your friends have told you.

For beginners, it is really important to understand that financial markets have certain collective properties that will never change: they consolidate, they breakout, they trend, rinse and repeat. I know that seems overly simplistic, but if you can understand and drill those basic rules in your mind, you will be far ahead of your competition from the start. It does not matter what fancy valuations or formulas you have for analyzing a company, every single directional trade you initiate will ultimately be a 50/50 proposition. Its simply a binary outcome. When you factor in brokerage commissions, bid/ask spreads, exchange data fees, and fierce competition you simple directional trade odds decrease to even less than 50%.

Since it's a 50/50 bet or worse, how do I make money?

It is my opinion that the vast majority of people who try to speculate in markets directionally will lose money of the long haul. Academic research has shown us that over time that only a select few investors actually have the skill to pick winning trades. If you want to be successful in investing you have to strategically shift the odds of success to a greater than 50/50 chance. Period. If you are willing to believe that the market is for the most part "efficient", then you can you learn to use derivatives to enhance your odds of success.

Don't eliminate Directional Bias

It should never be said that doing the necessary homework in order to make investment decisions is a waste of time. I'm not stating that at all. Even though basically all trades entered are a coin flip, it is still important to have an assumption on direction. The goal is create trade structures using options and portfolio management that will allow you to win more often than you lose. I don't want to see any of my readers searching for the Holy Grail in trading. It doesn't exist. Prices are chaotic and fluctuate noisily all the time. We want to use probabilities to make our returns, not guessing games. If you read through all of the sections of this blog and do study the materials, there is no doubt in my mind that you will succeed. It is possible, and quite honestly it's the only reason the small percentage of wealthy traders are able to make a living in the market.

How do you want to make your money?

This post is meant to be a short introduction on the very basic attitude and approach a beginner should have when first learning about the market. There are some people that enjoy anguishing to make stellar returns by relying solely on binary outcomes; however, there is a more efficient way to gain ALPHA. In the proceeding posts we will delve into using options in conjunction with your directional assumptions in order to achieve good returns.