"It's not You vs. The Market. It's just You" - Mark Douglas
Trading is a Darwinian process. In 2001 I began a concerted effort to understand equity markets and short-term market directions. I wrote hundreds of computer codes to simulate and test market data and short term timing models. Some focused on individual stocks, others on trading Profunds index funds. Successful trading is the art of identifying market inefficiencies and arbitraging them, providing economic value in the form of more stable prices closer to a reasonable measure of current "fair value". I search for models which are both simple and robust. Simple, because it's well-known in mathematics that even the most bogus of models can be made to fit a finite data series given enough tunable parameters. Robust, for obvious reasons - no one wants to see the wheels come off their trading model after they've put real money into it. This is why I'm deeply suspicious of models based on the output of neural nets. These attempt to find patterns among vast quantities of data with similarly vast quantities of tunable parameters.
I suppose it's ego-stroking to imagine yourself as a macho/macha take-no-prisoners warrior. Clearly the brokerage companies play on this with their "Trading is War" commercials as the hook. But getting lost in this is a really poor way to succeed. Capitalism, and trading, are fundamentally ethical means for bettering the lives of people economically. I like to think in terms of providing a service. The successful trader searches for market instruments which are inefficiently priced and attempts to reduce the volatility of the pricing to let it more accurately reflect the underlying value of the asset. You can search for assets which are underpriced with respect to their long term risk-adjusted discounted future value - such people are called "investors". Or you can attempt to dampen short term volatility about a more gradual trend. Such people are called "traders". Mutual fund managers have a long history of trash-talking trading while extoling the holy virtue of investing. It's blatantly self-serving, since fund managers do not like you to short-term buy and sell their funds. It makes more work for them. In fact, trading is arguably far more valuable and virtuous than investing. Traders provide the essential ingredient of liquidity in markets. Traders on average are quicker to interpret market and economic data and translate that into pricing. And contrary to the popular myth that traders make for chaotic and volatile markets, successful traders buy low and sell high (or short high and cover low) and thus reduce volatility. Those without the ability or discipline to do this over time lose their trading capital and thus are eliminated from the trading ranks. It's Darwinian!
I focus on short term trading as I have found this to be the most profitable. I'm what a hedge fund acquaintaince called a "stat arb". I look for statistical aribtrage opportunities. Physics types who've gravitated to the financial markets for their next challenge often end up here. For stocks, I look for those which are volatile, have reasonable 'depth' (average daily trading volume), and have long term trends which are gradual and change slowly compared to daily volatility. By attempting to trade away daily volatility I am less dependent on accurate long term predictions. I attempt only to make sure that the stock or index fund follows its long term fundamentals-driven trend in as smooth a fashion as possible. If you can find instruments like this, you can make a living by dampening their price swings. It's suprisingly easy to find them. Actually, most well-capitalized stocks I've examined show a bias to providing profit by trading short term swings. And this makes sense. It is my belief that the Great Market Crash of '00-'02 has created a need and an opportunity for capable short term traders. Traders need discipline, psychological stability, and a strong tendency to think independently in order to buy in dropping markets and sell in euphoric markets. The crash has traumatized a lot of investors. Trauma makes for a tendency to buy only after the market has comforted you with consistent bull moves and to sell only after it's convinced you it's really serious about going down - don't doit! Poor trading decisions! Remember how a generation or two ago was dominated in their thinking by the Great Depression of the 30's. Remember how much they oriented their lives towards saving, towards a low-risk life style. And not just in the immediate aftermath, but for decades. Trauma creates pricing inefficiency. I believe this will continue for some time, although volatility will no doubt gradually lessen, especially with the spread of program trading. I'm already seeing that happening to a significant extent in these past 3 years. Nevertheless, for now, it's still a great time to be a trader if you can overcome your own shell-shock.
You may wonder why I trade stocks and index mutual funds instead of futures or options. After all, options and futures have a big tax advantage - regardless of holding period, you are taxed mostly at the long term capital gains rate. But they have one big disadvantage too - trading in these instruments is dominated by very well-equipped professionals. Also, the options market is not as liquid and have a larger spread, typically. It's harder for you to value-add and get paid for your time and work. And for me, with big capital losses banked from the Great Crash - I don't need any tax advantages. I got motivated to learn how markets work the old fashion way - by taking a whipping first.