Many people believe that success in the financial markets is all about being lucky and that there is very little skill involved. Many studies have been performed on this specific topic and plenty of traders have been interviewed to get their take on this topic.
Is success in the market based on steadfast research and skill? Lucky hunches? Or… is there some truth to both sides of the argument?
Luck and the “Hunch”
Traders have been known to have incredible instincts when it comes to the movement of the market. Some people believe that these traders are just lucky and tend to make the right choice at the right time, with no real skill involved.
So, what is this mythical “hunch” that traders have and is it simply luck? One neuroscientist believes that the hunch is actually a biological process. Dr. John Coates wrote in his book, “The Hour between Dog and Wolf: How Risk Taking Transforms Us, Body and Mind”, that hunches are somatic markers that have been imprinted in the brain based on past successful trades. He suggests that the brain and body remember the conditions that preclude a successful trade and when those conditions are present again, the brain and body signal the person that the conditions have been successful in the past, which triggers the “hunch” that some traders claim to have experienced.
This theory is one of many that researchers have investigated to understand the key to successful trades that result in profitable traders. Some people still believe that the trader is simply lucky and it has nothing to do with biology, or skill, and that the being profitable in the market is simply a 50/50 lucky guess.
Most traders that I have come to know over the years dismiss the luck hypothesis as being the rantings of unsuccessful traders. They believe the countless hours that they have spent studying the “ups and downs” of the market have provided them with the skill and knowledge to predict market movement.
The saying goes that, “History always repeats itself”, and that is the foundation of many trader’s research. There are several factors that play into the “historical” data that is used to predict the markets. Deciphering this data and applying it to current conditions is believed to be a skill that is learned and honed by years of experience.
Most experienced traders will tell you that they have spent most of their adult lives studying the market and that the success of every trade is based on countless hours of research.
A Fine Balance
While I find Dr. Coates research fascinating, I still tend to lean towards the skill over luck argument. The complexity of market movements and all the factors that play into a successful trade make it difficult to believe that success is purely based on luck.
Traders may have had a few lucky trades that have been profitable, but a trader who has had consistent success in the market has done so through acquiring specific market knowledge. By studying the history, movement, political and socioeconomic conditions, successful traders have honed their skills and built a base of knowledge that gives them the ability to make knowledge-based decisions on which trades are going to be successful.
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