Howard Marks is one of the most famous investors in the world. He is the founder of Oaktree Capital Management, a hedge fund that invests in alternative investment strategies, and has a net worth of more than $2 billion. He is also an author and regular interviewee in the financial media. In his latest book, Mastering the Market Cycle, Marks writes about the need for investors to develop a solid philosophy. It is this philosophy that helps them know what to buy, when to buy, and when to exit. While these steps were mainly for long-term investors, they can also be applied to all traders. This article explains the five steps that will help you develop this philosophy.
- Develop your technical skills
Whatever type of trader that you are, it is important that you have some technical knowledge in finance and economics. Finance is particularly important if you are specializing in stocks trading. It will help you interpret different financial data. Economics is important because it will help you interpret economic data that is released every day. To acquire these technical skills, you can either start a formal educational course with a college or teach yourself with books and online guides.
- Get a view on how the markets work
As a trader, you need to see how the market operates and how the different parameters influence the price movements. You can develop this view by spending time analyzing how the market moves, and reading as much as possible. For example, if you are a trader focused on long-term trades, you can read books and statements by Warren Buffet. If you are a short-term trader, you can read books by successful traders like George Soros. You should develop your view market view before you start trading, and it should also be flexible. This means your market view must be added to, questioned, refined, and reshaped as you proceed.
- Exchange ideas with fellow traders
As a trader, it is important to learn from the experience of other people in the industry. For example, successful investors and hedge fund managers attend the World Economic Forum at Davos or events such as SALT conference, SOHN Conference, and Robinhood conference. Similarly, you should strive to attend similar but smaller events, that are aimed at retail traders. You should also participate in webinars that bring together investors from around the world. These events will help you learn new skills. Trading is often a solitary job, and those who practice it in solitude risk missing a lot, both intellectually and interpersonally.
- Read and learn
A large part of your trading knowledge will be acquired through reading. It is recommended that you spend as much time as possible reading, and taking notes from, books on investing, trading, finance, and economics. There are hundreds of books available either physically, or as ebooks. This will help you improve your trading method, by embracing ideas you find appealing, and discarding ideas you don’t. For example, if you are a gold trader, you can read The New Case for Gold by Jim Rickards and if you want to know more about the euro, you can read The Euro by Joseph Stiglitz. If you want to start learning at a more basic level, easyMarkets explains what forex trading is and offers guides for beginners.
- Trade and practice
Finally, there is no substitute to trading because you learn a lot from each trade that you make. No trader is perfect, so you will often make mistakes. It is these losing trades, however, that will lead to significant lessons. You will become more experienced, the more you trade.
Having a good trading philosophy will make your trading life more interesting. This is because it will help you know when to start a trade and when to exit. It will also remove the anxiety that is associated with the market, and ultimately make you a better trader.