Knowledge Management for Stock Trading
Successful Trading by Managing the Knowledge and Skills
Apr 18, 2009
Stock trading (or similar kinds of trades like futures, forex, etc) is based on technical and fundamental analyses of the market trend. It is commonly believed that a successful trader needs to analyze the market both technically and fundamentally. In other words, none of them are reliable alone, and it is needed to put both of them in action. However, the most difficult part of trading is to keep balance between the fundamental and technical analyses, and to decide which of them is reliable in a critical situation.
As discussed in a seminal article entitled Knowledge Management as a Theory of Everything, far beyond its classical realms, Knowledge Management can be applied to various knowledge-based subjects to keep the science and knowledge balanced. This is indeed a vital need for stock trading, as a trader is normally faced with an unlimited world of knowledge and possibilities, but having a limited skill.
Although several well-defined knowledge management tools can suggest a practical framework for stock trading, as a preliminary article, only some critical tips are provided here. Traders are probably aware of such tips as speculations, but knowledge management provides a solid framework for further analysis.
Why Knowledge Management Is Needed?
Statistically, both the bullish and bearish trends have the same probability. Thus, if repeating a single trade in a wide enough period of time, the chance of winning should be 50%; so why most of traders lose. In a rough estimate, only 10% of traders are winners, which are normally major traders (like banks, financial institutes, etc), brokers, and professional traders. This is based on the assumption that the amount of money in the business is constant, and someone loses when someone wins (this is an evident situation in forex).
Thus, one should be able to change this 50-50 probability by a little wise action; but this does not occur due to the lack of knowledge management.
Trader’s Skill Is the Key
According to the most solid strategy of stock trading, people usually try to mix both the fundamental and technical analyses, but it is the worst method from the knowledge management point of view. Knowledge management is based on the fact that ‘science is prior to knowledge’; and in the present case, science is akin to the trader’s skill to analyze the data (knowledge).
For technical analysis, one needs mathematical skills to interpret the significance of the curves and their meaning for forecasting the future movements; and for fundamental analysis, one needs to have analytical skills for analyzing the news (e.g. from political point of view) and their impacts on the stock market. Although new traders are widely advised to use both of these analyses to prove each other, it is better to focus on one of them in which the trader has the appropriate skills.
Trading Systems
Traders usually use different trading systems to find the safest trading conditions suggested by different strategies. However, knowledge management suggests focusing on one single trading system, as the trader has sufficient skill to understand all of its aspects and use all of its opportunities. Mixing different trading systems is only possible when a trader has successfully used the individual trading systems alone. Now, it’s time to overlap such successful trading systems to design a new combined trading system.
Pool of Knowledge
Unlimited factors have influence on the stock market (more or less), but no one can monitor all effective news. Traders usually believe that for a perfect fundamental analysis, they need to consider all the news (as much as possible); but this is the harmful knowledge (defined in knowledge management) leading them astray.
It is really hard (if not impossible) to recognize which news have more impact on the stock market, but a trader needs to manage the relevant knowledge; and to this aim, it is truly needed to define a limited channel of news. Traders usually believe that by this action they will miss some great opportunities, but practically the misguide of a vast range of news is more significant.
More Opportunities for Mistake
People believe that more opportunities is more chance to win, but at least in stock market, more opportunities are also accompanied by more mistakes. The hidden fact is that a success trader is not the one who makes more right actions, but the one who makes fewer mistakes. In other words, a trader should focus on the possible mistakes to avoid them.
From knowledge management point of view, 'it is wise to deal with a few variety of knowledge as one can handle'; thus, few opportunities as the trader can dominantly handle are enough. This is the reason that focusing on one stock is highly recommended.
