He are three principles that I think are important for success in the markets. They are all related to nature in some way, so I’ve grouped them together.

Key #1: Be Yourself

Summary: Nature (and the markets) punish those who go against the flow. You have to trade in harmony with your personality, and your means, and your environment. Otherwise, you will find yourself extinct.

When a bird on the ground wants to get to a tree branch, it doesn’t try to climb the tree. And it’s a good thing, too, since it would probably really suck at tree climbing. Everywhere you look in nature, you can see similar examples. For instance, trees don’t walk over to a nice spot, take out a shovel, and plant their seeds. Instead, they work in harmony with their environment (sometimes in strange and surprising ways) to “accomplish” their propagation.

I put “accomplish” in quotes, because there really is no effort involved. Birds don’t struggle to fly… they just fly. In nature, a predominant theme is to take the path of least resistance, and everything in nature seems to have developed an easy balance. Taoists have a concept of “wu wei” that describes this idea of “going with the flow” and “action without force.”

Some people believe that a higher power designed everything this way. Others prefer to think in terms of natural selection. But, regardless of how you think it got here, it’s here. Nature is complex, and chaotic, and does not reward those who fight against it. And, the stock markets are pretty much the same way.

Take me, for example. I don’t have a long-term viewpoint on stocks, or the overall markets. That stuff bores me. My broker’s commission structure does not lend itself well to scaling in and out of trades (at least not more than 2 entries/exits, anyway). I don’t have a large enough account to hold more than 2 or 3 positions at once. So, I am obviously not going to try to trade like a hedge fund. If I did, I would be the bird climbing the tree.

At the same time, if you do have a ton of money to invest over a long haul, there’s no way you should be trading like I do. It’s not practical. If you have too many distractions during certain hours, you shouldn’t try to trade through those hours. Et cetera, et cetera.

I wrote an article last year on this topic, called Trade In Harmony With Your Personality. It has more examples, and suggestions about how you might go about refining your style to fit you better.

Key #2: Stop Pretending You Control the Markets

Summary: When it starts to rain, you can seek shelter, or you can get wet. Nature doesn’t give you any other choices, and neither do the markets.

When my cats jump up on my countertops, they do their best to plan beforehand. They step back and look for any objects big enough to see from the ground. They stand on their hind legs and try to peek at their desired landing area. But, they still can’t see enough to be sure. At some point, they have to use their past experience, and their best guesses, and just jump. This is the same thing we do when we trade stocks.

I know what I expect my target stock to do, based on all the charts I’ve seen in the past. I look at various indicators, and market mood, to try to confirm my guesses. In the end, though, I just have to jump in and see what happens.

The difference between cats and novice traders is: when the cat doesn’t like the situation it finds, it jumps right back down. Sometimes, it’s able to change course in mid-air, not even landing at all. Novice traders, on the other hand, jump into a stock trade, and stick with it no matter what. They seem to have an infinite capacity for denial.

Say a stock trader opens a position expecting a run, and the price action stalls instead. Most traders I’ve met take this as a cue to start doing further analysis. “It’s still got good tone compared to its sector,” they might conclude (or any number of other reasons why the trade is still looking great). A lot of them also focus on what they want to happen (as in “I’ll wait for it to move just a few more cents and I’ll get out”), as if the market cares.

Some see reality (perhaps whining “hey, the trade’s stalled out” in some public forum), but they still do not close out their position. Another common reaction is to root for the stock, or otherwise somehow try to mentally prop it up.

All these reactions are stressful, and ultimately useless. Be like the cat. The cat knows it can always jump back up again, whenever it wants to. Deal with your situation.

Today (6/20/2007) on Wallstreak, I gave an example along these lines from a trade I made in SLAB. It was a stock I expected to run, but it stalled instead so I got right out. That’s just this article’s example, though… any time the markets don’t do what you thought, just get out. If you expect an uptrend and it makes a lower high or lower low, stop making excuses for it and get out. Got it? Good.

Key #3: See What’s Really There

Summary: Look at the markets like an artist looks at nature. Don’t abstract away all the richness of the market environment.

Nature is extremely rich and complex, but most of the time people are almost literally blind to it. We label things and box them into abstractions. In math and science, this is a really useful human ability. When living your life, I’d say it’s more of a liability.

When you look outside, do you see “the lawn” or do you see “millions of individual blades of grass, all different”? You filter out most of your available sensory information, most of the time. Most of the day, you probably don’t feel your clothes, or hear your refrigerator humming, for instance. But, if you choose to, you can.

In the markets, too, many of us throw concepts around and ignore the richness underneath. “Hammer” candle. “Liquid” stock. “Choppy” day. “Capitulation” selling. These simplifications make it easy to communicate in some basic way with other traders, in the same way as you might tell someone in passing that you have two trees in your yard.

That’s fine for a casual observer, but an artist would want to see those trees, and observe their individual shape, color, and texture. An artist pays attention to the individual leaves. And just as every tree has depth and complexity, every candle on your chart has unique time, volume, and trade rate characteristics (to name a few). You might be surprised what you can notice, if you actively watch the detail.