“You know what you know, and you don’t know what you don’t know. You know?” – Charles Faulkner (1993)
Fair enough. Experienced traders (and investors) know they need more than one skill to succeed. Moreover, as Robert L. Hagin wrote in Investment Management (2004), “The skills that lead to success in most human endeavors are not necessarily the skills that lead to investment success.” These unusual skills are typically referred to as “markets, money and mind,” or slightly more specifically, trading/investment strategies, money management and psychology. Though many market wizards have written that mastery of one of these areas does not substitute for skills in another, traders (and investors) alike almost always take them one at a time, and almost always start, and often stay, with market indicators.
The initial obsession with market indicators usually takes the form of price charts in a few time frames with several standard types of Technical Analysis. Some form of moving averages are a favorite. What could be easier? Especially in contrast to the efforts involved in learning something as comprehensive as Fundamental Analysis or as complex as Probability Theory. This is the knowing/comprehensible question raised in the first couple entries. Because we can look at charts and know something, we have a wonderful warm feeling that fogs over the fact this is only one way to look at whatever it is we think we are looking at. What Daniel Kahneman (2011) calls “What You See Is All There Is (WYSIATI)”. Attention quickly settles on a few markets, charts, timeframes and indicators – often selected because of their recent market visibility and/or someone’s recommendation. The time spent trading these few markets and indicators is emotionally absorbing, and so it feels like real effort, but is not actually systematic or effortful enough to the extent of skill building.
Shorter time frames, measured in minutes, are more appealing because they fit our human sense of significant (price) action. In these constraints, money management is merely a matter of account size. A small account holder thinks he can deal with volatility by jumping out, not because it is an effective time frame or trading strategy. These defaults in market indicators and money management have several knock on effects. Over trading, in terms of frequency and amount per trade, becomes common. Less apparent, and perhaps more important, these initial defaults begin to become the limits of the trader or investor’s understanding and ability to interaction with the financial world. Worse, they don’t even realize this, and apply their partial knowledge until their capital is gone.