Schools of Thought in Trading and Investing

 

When participating in financial investment activities, you can choose to become a discretionary trader, an automated trader, or a value investor. Each approach can help you make money. There is often much debate within the communities of these schools of thought, with everyone believing their method is the most effective. Typically, only a few people practice all the methods; most choose one that suits them best. Automated trading requires strong knowledge of mathematics and programming, discretionary trading relies on intuition, psychology, and market sentiment, while value investing demands a solid understanding of business and management. Each school of thought has its own strengths and weaknesses. They can even be considered opposites of each other: value investing advocates often oppose trading, automated trading enthusiasts may not support discretionary trading, and vice versa.

Currently, I am practicing all three methods and allocating my capital across these activities. I believe that when engaging in financial investment—or even in life—we should choose the middle path. This means not overly prioritizing or idolizing any single approach. Things are not necessarily in a binary state of right or wrong; rather, they exist in a superimposed state, being both right and wrong at the same time. At one moment, something may be correct, but at another, it could be incorrect. It’s possible that everything we do is, to some extent, a gamble. By applying and practicing multiple methods, we can develop a more objective and comprehensive view of the market. Instead of betting on a single, supposedly "right" choice in the game, we choose all possible options. This increases the chances of maximizing our success in investing.

The focus of this blog will mainly be on trading—actively buying and selling to profit from price differences. I will present the foundations and methods I have used to make a living through trading. A small portion of the blog will be dedicated to how I practice value investing from a trader’s perspective. Value investing allows us to make money not just by profiting from price differences but through other means as well.

Most newcomers to the market immediately search for trading strategies without adequately preparing the necessary mindset. To succeed in the market, having a method alone is insufficient. The market is filled with traps and unpredictable risks, many of which are either intentionally or unintentionally designed to cause traders to lose money. The participants in the market are highly diverse. It is a place where some of the smartest and most intelligent minds in the world converge, equipped with advanced tools, abundant resources, skilled personnel, and extensive experience in the market. For a beginner just stepping into trading, the chances of outsmarting these seasoned players are exceedingly slim. Moreover, there exists a sophisticated scam industry that spreads misleading ideologies to beginners for profit. This includes individuals who are not truly successful in the market but take on the role of guides, offering courses, selling trading signal services, or even establishing fraudulent organizations to make money.

New traders tend to be overly optimistic, believing that success in the market is easy to achieve. They set profit expectations of hundreds of percent per year or tens of percent per month, unaware that such returns are the dreams of many of the world’s greatest minds. Legendary fund managers and investors in the industry typically achieve long-term returns just slightly above 20% per year. Most funds and investors don't even manage to outperform the general growth of the stock market. This means that by simply investing passively in a stock index, you could already outperform the majority of the market’s brightest minds.

If you’ve been trading for a while, you’ll find this to be true. You might even come to believe that there are no strategies or individuals capable of consistently achieving superior profits in the market. This is a stage that almost every trader goes through. At this point, many will quit trading altogether. Those who continue often become extremely cautious, losing faith in almost everything. They develop a highly negative outlook and are reluctant to embrace new ideas. In reality, there are still groups of traders who achieve returns higher than the market average. However, they tend to remain under the radar and are reluctant to disclose their methods.

If you can overcome this negative phase, you’ll step into the realm of true winners. Here, you’ll realize that trading is an entirely different profession. It’s no longer just “trading” but transforms into something else—a role in management and a true business venture. You’ll start to notice that there are indeed others who are successful and have achieved success. You’ll learn to distinguish them from the countless scammers. These successful individuals may have appeared earlier on your journey, but at the time, you lacked the experience and understanding to recognize them.

In trading, there are two main approaches: discretionary (manual) trading and automated trading using algorithms. These two schools of thought differ significantly, with many believing they are entirely opposite. Automated trading involves strategies with fixed rules executed by computers. This approach eliminates human emotions entirely but lacks adaptability to changes. It can be rigorously tested and is often regarded as a scientific method. On the other hand, discretionary trading is executed by humans. Buy and sell decisions, as well as strategies, are often flexible and may involve intuition. While it can also rely on fixed rules, traders have the freedom to adapt them based on market conditions. This method can be tested as well, though the results are less clear-cut and precise, making it more of an art form.

Regardless of the method used, I believe each has its own strengths and weaknesses. Their mechanisms of operation are different, even opposite, so I think we should practice both to diversify and enhance adaptability. Around the world, there are many successful discretionary traders as well as many successful quantitative traders. You don’t necessarily have to choose one over the other. For example, when I successfully design automated trading systems, I have a lot of free time, which I can use to hone my manual trading skills. This helps me gain a deeper understanding of the market and develop a sense for its movements. At the same time, it allows me to discover and create new ideas and strategies to incorporate into my automated systems. When the market undergoes significant changes and automated systems don’t perform well, human intuition and adaptability can provide crucial support. Conversely, when our manual trading is subpar or we are mentally unfit, computers and robots are there to assist us.

Reaching the end of the trading journey is undoubtedly a challenging task. However, with adequate preparation in knowledge and the right mindset, I believe anyone can achieve it.

The insights I share in this blog are the culmination of years of hands-on trading experience in the market. These lessons can serve as a foundation for developing both automated trading systems and discretionary trading approaches. They have helped me go a long way, and I hope they can help you as well.