The most critical skill in discretionary trading is, without a doubt, the alpha generation process. In essence, risk should only be taken when you possess insights into future market flows that others do not—a true edge.
Identifying these edges can vary significantly with market conditions—what may be relatively straightforward in one regime can become exceptionally challenging in another.
Edges inevitably decay over time as market participants who create the inefficiencies turnover capital to those who capture them. Eventually, the dollar-weighted average participant adapts, eroding the inefficiency until it ceases to exist.
One must constantly refine and find new sources of edge. Fast iteration cycles result in swift alpha decay, allowing us to witness generations of market evolution/natural selection unfold within remarkably short timeframes.
A simple yet crucial skill in trading is the ability to explain why the market moved as it did today. This involves processing new information, translating it into a fair value, and then comparing that with the market's actual response.
By measuring these discrepancies and discounting sources of uncertainty, you're left with a clearer understanding—and sometimes, an edge.
The most consistent and repeatable edge in markets lies in the ability to process information more effectively than the dollar-weighted average participant in a market.
There are many ways one can beat the market and find edge.
Some traders leverage extensive information networks, enabling them to interpret a broader range of market movements than others.
Others invest in robust news infrastructure, positioning themselves among the first to receive and react to new data.
Or one can excel simply by having superior intuition and being more precise in evaluating how a given piece of information impacts the market's fair value.
After alpha generation, the second most crucial skill is monetizing the edge, with position sizing playing a pivotal role. There's a natural tendency to size all bets uniformly, but in reality, the edges we encounter can differ vastly, sometimes by several orders of magnitude
These feel obviously uncomfortable at the start, but after looking back through a trading career, a majority of wins come from slam dunk obvious spots where the edge was so much exponentially larger than typical that it could have been sized so much bigger with relative safety.
Conversely, so many trades can be attributed to bets with such a thin edge or so much uncertainty that in retrospect shouldn't have even been taken at all, regardless of the PnL outcome.
In every market cycle, there are generational opportunities that demand maximum conviction—moments where you’re meant to go all-in with your full stack.
There have been a few of these already that I have been blessed enough to capitalize on this year.
The bittersweet reality of the leverage these markets offer is that it can crown you a king with a single well-timed trade, or reduce you to the slums with one overconfident misstep. There is a fine line between boldness and recklessness that one can never be too sure of.
Sizing is more art than science, refined continuously throughout a trading career.
The intersection of your conviction and your risk tolerance.
The final skill is managing your emotional state—an intensely personal journey unique to each trader.
Much like edge generation, this aspect of trading demands ongoing iteration and is a lifelong pursuit.
Ed Seykota famously said, "Win or lose, everyone gets what they want from markets. Some people seem to like to lose, so they win by losing money."
A common tragedy in these markets is that many people are more driven by the desire to feel something than by a genuine commitment to winning. They get caught up in the allure of excitement of quick riches.
Another common pitfall is the desire to be right rather than the desire to make money. This mindset often leads traders to double down on losing positions and take unnecessary risks, driven by ego.
Whatever deficiencies you have within yourself inevitably find a way to manifest in your trading. In many ways, trading acts as the ultimate form of therapy, relentlessly exposing personal biases, emotional triggers, and areas of weakness.
It forces traders to confront their fears, impatience, overconfidence, and need for control, providing a mirror that reflects not just market performance but personal growth.
The journey to becoming a better trader often parallels the journey to becoming a better, more self-aware individual, making trading not just a financial endeavor, but an exercise in self-improvement.
In summary,
trading, at its core, is a measurement problem.
It all boils down to how well you measure flows, market movements, edge, uncertainty, risk, emotional state relative to your competition.
it's is a fun intellectual game—arguably one of the most engaging and dynamic games to have ever existed.
I am blessed to trade these markets everyday for a living.
Some of the things I've talked about may seem exceedingly obvious but I enjoy talking about things abstractly as you tend to uncover more universal truths.
I hope it was helpful for those starting out in their trading journey.
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