Thus was born the eNASCAR series, a virtual racing experience involving the video games because he tinkered with go-karts as a child, the virtual reality is …
What kind of skills and character traits make a good trader?
What makes a great trader?
1- Effort. There is no holy grail in the market, but if I were to select the pair of success-contributing factors that comes closest to representing it I’d pick hard-work and discipline. Hard work and discipline lead to the development of self-confidence, one of the most important traits in a trader. Over-confidence and lack of confidence can destroy a trader because oftentimes a trader’s most important decisions will come down to his ability to be bold but not reckless and emotional, all under great pressure, while dealing with uncertainty. Why is there no holy grail in the market? For the same reason you can’t throw boiling water in a bowl and call it soup. There’s a process involved. In short, a trader striving to be great must work harder than everyone else for the same reason anyone who wants to be great at anything should work harder than everyone else. The 10,000-hour rule supports this. It is this hard work over time that will greatly contribute to a trader developing two important things: an edge and intuition. An edge is very important. It’s your competitive advantage as a trader and most great traders have an edge of some sort, even if it’s illegal. Intuition or gut feeling is something most traders can identify with on some level. Some folks, like hedge fund manager Steve Cohen, attribute a good deal of their trading success to their feel of the ‘tape.’ This sixth sense is nurtured and developed through hard work over time much like an algorithm that goes from the hands of a mediocre engineer to those of a great one, and is greatly responsible for the development of two of the hardest skills to develop in trading: the ability of knowing when to load up a little more on trades that you feel have a much higher probability of being successful, and not exiting a position too early (letting your profits ride).
However, hard work in and of itself isn’t enough. You must work hard and smart. Very smart. Some of the hardest working and most intelligent human beings on the planet are lurking on the other side of your trades waiting to strip you of your money. Whether you think of it in this way or not, it’s war. Smart work involves learning from mentors and others who are smarter than you in different areas. I don’t know of any traders who have literally made it on their own. I’m sure there are some but they are the exception rather than the rule. Trading is very much like a sport and I can’t think of a professional athlete that has acquired world class skill and success without the help of good coaching/training. For instance, the poster-boys for individualism in the world of sports are boxers and even they are increasingly hiring strength and conditioning coaches and nutritionists, and this is in addition to their regular head trainer, to compete at the highest level of their sport. Heck, Nonito Donaire from the Philippines, who is slowly becoming one of the best boxers on the planet, has even hired a sprinting coach to work on his explosiveness and power while honing his quickness and reflexes. Why shouldn’t a trader who wants to be great push for this same level of specialized training? Leveraging other people’s talent is important for a trader especially if he eventually wishes to build a company. Also, a successful trader has an unquenchable thirst for knowledge which can be satiated by an intelligent hard working disposition.
2- Emotions. A great trader is able to: (a) control his emotions and (b) feel an emotional connection (passion) of some sort to his craft.
(a) Letting your emotions get the best of you can kill you in this game, so it pays to work at mastering the psychology of trading as best as you can. Entire books have been devoted to the psychology, inner-game, of trading. Divorcing oneself from one’s emotions is one of the hardest things for a trader. Some are better than others at doing this but it’s a challenge for virtually every trader because emotions, mainly fear and greed, are known as the main drivers of the financial markets. It’s not hyperbole to say that one can greatly benefit from being “machine-like” while trading. Getting overly excited over a winning trade can be just as detrimental as getting overly upset after a loss because in both instances one’s judgment and ability to objectively discern a situation for the next trade can be influenced. This lack of emotional control can lead to trading pitfalls such as over-trading, blaming the market for your losses and becoming stubborn in wishing to be proven right against the market. It’s hard for some traders to admit and even harder to actually do, but a good way of ending a losing streak or funk is just to walk away from the markets altogether. Take the day off. Allow your mind and spirit to instill in you the necessary perspective to get back on track.
Moreover, as a trader it pays to be brutally honest when it comes to your personal shortcomings and weaknesses because there is no hiding them in this arena. Trading inevitably becomes the most perfect mirror that will ever stare you in the eye, the one that broadcasts to the world the zit still underneath the surface, the unevenness in the size of the pores on a certain section of your face, the one that will remind you daily in the form of red splattered all over your profit and loss statements of how much you need to improve. It can be a brutal game, indeed. Thus, as a trader it is important to identify what you are good at, what you are bad at, while taking measures within your trading system that enable you to highlight your strengths and minimize and improve your weaknesses.
Two of the most important lessons I have learned in the markets are: (1) you, not the market, are your worst enemy, and (2) learn to lose. The former emphasizes the importance of knowing and mastering self, while I will elaborate on the latter. To learn to lose does not mean that you expect or accept defeat. Quite the contrary since the adage attempts to instill the notion of avoiding future defeat by totally eliminating all negative feelings associated with any present losses. You see, some folks are so ultra competitive, egotistical or even stubborn that their natural tendency after a loss is to want to ‘get-back-at-the-market,’ or worst yet, to want to make up for a loss all at once by hitting a home-run instead of focusing on prudent, slower, steady incremental profits. After all, as kids many of us are taught by our parents to not remain with our arms crossed if we’re hit by a classmate, so it’s interesting to see this childhood dynamic unearth its ugly head in the financial markets, only that the classmate that can’t keep his hands to himself is the size of Godzilla and can literally decapitate you from existence should you dare hit back. When a trader has not learned to lose he loses sleep over the “what-could-have-beens” of the day, beats himself up over mistakes, has a difficult time moving on and starting from a clean slate emotionally, and this in turn negatively undoutedly affects future performance. Learning how to lose is one of the most empowering market lessons I have learned because I relish competition too much sometimes, so I’ve had to learn how and when to move on.
(b) I’ve noticed that most successful traders are passionate about either trading itself or some of the destinations for which trading will serve as a bridge. Some traders who are passionate about trading itself feel that they were put on this Earth to trade. Trading isn’t a job for them, it’s a lifestyle. They love it. It feels like a game to them. What nerves or inability to control emotions? Now, when thinking of those traders who are passionate about a destination for which trading has or will serve as a bridge it reminds me of Muhammad Ali who once said that boxing was God’s way of introducing him to the world by making him well known enough to where he could do more good. Successful traders sometimes see their chosen field as a vehicle to a higher calling. These traders feel and think big, with an oftentimes deep desire to want to change the world.
3- System. I know almost nothing about NASCAR. However, I recently caught a glimpse of a Jimmy Johnson interview on HBO in which some trading thoughts popped into my head. As far as I know, Jimmy Johnson is or was on an incredible run of sorts and is considered one of the greatest race car drivers to ever live. In this interview he was asked about the most important factors to success on the track. Is success in a race more linked to the car, the team, or the driver? I came away from the interview realizing that Jimmy’s answer looked something like this: 30% Car, 30% Team and 40% Driver. Yes, ultimately the driver may be the most important element by a little, but boy are the other two elements important! As it relates to trading, your trading system is your car.
A trader’s trading system enables him to enter the right trades, at the right time, while establishing strict controls to exit, increase or decrease positions accordingly, with a strict focus on identifying what’s working at that moment in the ever-changing landscape of the world financial markets. Extensive planning, research, testing and iteration, financial modeling and forecasting can be crucial elements in developing a robust and scalable trading system that can compete with the big boys. In my opinion, a good trading system focuses on the proper execution of the trade itself rather than profits or losses. The profits will follow as a result of trading properly. This is where discipline comes in. You structure a great game-plan in relation to your trading system, execute it properly while entering high probability trades and the rest is oftentimes out of your control. It’s important to remember that the markets are a game of probability. There are no sure-win trades. The better your trading system the more likely you are in identifying trades that have a high probability of working out. Simple math will tell you that you will come out ahead at the end so long as you cut your losses early and let your winners ride. At the end of the day every trader is in search of a trading system that will work for him or her, whatever that entails, so long as one can intellectually support his reasons for why the system will work (consistent profits are the best evidence) while building in controls that allow flexibility, adaptability and sustainability since markets are always changing.
Not treating trading as a real business is a mistake that many traders, especially novices, make. On the surface trading is one of those endeavors that can lead to a drastic false sense of security because it looks so easy. Pick a stock, buy it, you’re lucky enough that it goes up, you make money. This easy, get-rich-quick overtone enveloping the market leads many to careless behavior not in tune with basic principles of running a successful business such as learning about your market, studying the competition, putting in a tremendous amount of hard work with a strong focus on efficiency, etc. “Get better or get beaten,” the title of a Jack Welch book, is one of my favorite quotes.
4- Risk. Some might argue that risk management is the most important factor in becoming a successful trader because what good is there in being able to make tons of money if you haven’t developed the necessary skills to keep it from disappearing. After all, hypothetically speaking, you can be very bad at making money but supremely good at not losing it and all you need is a little luck on a few trades every now and then to come out in the black (profitable) over a period of time. There is such a thing as over-diversification, where too much of it can actually hinder performance. Ways of diversification are well documented. One of the best pieces of advice I’ve received on this front is “unless you have a compelling reason that falls within the confines of your trading system, cut your losses immediately. Stop the bleeding right away. Conserve your ammunition for more favorable conditions that will put you ahead in the game.”
5- Independence. The market punishes sheep mentality. Personally, not only do I try to not pay attention to recommendations by so called experts or gurus but also try to not give any recommendations of my own because it encourages laziness on those on the receiving end. Plus, it just isn’t rational. Why would you listen to some market guru’s advice on what to buy or sell when you have no idea if this person’s interests are aligned with yours? How do you know this person is not selling while you are buying or vice versa? You don’t, so don’t listen to them. Make up your own mind through hard work and intelligence. One of the great byproducts of thinking independently about your market actions is that it enables you to be more flexible and adaptable with your strategy. This happens because you are more likely to change directions quickly, especially when it’s totally necessary, when you don’t have other voices in your head conflicting with your conviction on what you think is right. The less clutter in your mind the better, the more nimble you are likely to be. “Adapt or die” is an axiom all traders should keep in mind.
In conclusion: There is no secret formula to trading success. Becoming a great trader has more to do with you than the actual market. You, not the market, are your worst enemy. The market has done what it has done and will continue to do what it’s going to do regardless of the actions of any single person or entity, therefore every trader’s challenge is to figure out the best, most sustainable and efficient way to extract profits from the market in a low risk, high probability manner that allows for flexibility and change.