Traits of Successful Traders:
3. Intellectually honest.
4. Rationally accepting of failure.
5. Have an ability to suffer.
6. Learn from their mistakes.
7. Hyper-competitive, driven.
8. Have a strong work ethic.
Good Traders are Disciplined
It is easy to wonder what is right, somewhat more challenging to figure out what is right, more difficult still to understand why something is right, but very hard indeed to do what is right, particularly when the course of action may be unpopular, unpleasant, and involve personal or professional costs. It is very easy for anyone to say what she is going to do; it is much more rare to find someone who consistently does what she says. The other ten traits are important; discipline is mandatory. Discipline enables all of the other traits to be expressed, and allows a strong analytical process to be translated into thorough trade selection, rock-solid execution, and effective position management. This is one major reason why former athletes and ex-military are so highly prized by trading firms, often above more highly intellectually pedigreed individuals. If an ex-Marine or Navy SEAL says they’re buying here and selling there, you had better believe things are getting bought here and sold there.
Good Traders are Self-Analytical
All machines break down from time to time, and every motor needs the occasional tune up. Flaws can creep into any (or all) aspects of a trader’s methodology, and if left undiscovered or unchecked will destroy even the most robust process. While honest, objective feedback should always be welcomed, a trader cannot rely on others to diagnose the flaws in his technique. A trader’s peers may be unwilling or unable to offer productive critique, and even if they are, the trader may not be able to process and use the information. A professional trader must be both willing and able to forensically examine the decision-making process and all aspects of the methodology to determine if there are flaws that need to be addressed. Debugging a trader’s methodology will be discussed in greater detail in Chapter 16 – Navigating the Corporate Culture.
Good Traders are Intellectually Honest
Most people find it extremely easy to lie to themselves about the underlying motivation for their actions. This prevents personal growth by denying them opportunity to learn from their mistakes.
Taking a significant amount of risk is a very committing exercise, requiring a great deal of forethought and no small amount of emotional stress. Once invested (in both senses of the word), it can be difficult to hear counter-arguments or process incremental new information, regardless of how critical, timely, or obvious. In extreme cases, traders will go to elaborate lengths to convince themselves the market is acting “irrationally” or “stupidly,” that the shift in fundamentals was “bad data,” and that devastating information is “just noise.” It is difficult to believe how fully intelligent, perceptive individuals can deceive themselves under stress.
Intellectual honesty allows traders to self-police their actions. Traders must be able to step back and ask themselves “why am I doing this?” If they don’t have an answer, (or it isn’t a good one) they need to check themselves before they wreck themselves.
Good Traders are Rationally Accepting of Failure
Poker players sometimes say, “A real gambler doesn’t need anything.” It does not take any self-actualizing philosophy to imagine that desires can, and do, influence the decision-making process. Wanting to win too badly can muddy up what needs to be a clinical assessment of the risks and rewards inherent in any proposition. Needing a particular result makes it paradoxically more difficult to achieve.
This behavior is on display every weekend on television as highly compensated professional athletes miss short putts, drop easy catches, and brick free-throws that they could make with their eyes closed at practice or with nothing at stake. The sudden pressure of having to do something completely ordinary (and the associated consequences of failure) can transform any task from routine to impossible. Losing traders who approach their maximum allowable loss for the year almost inevitably explode violently shortly thereafter. The combined pressure of wanting desperately to succeed but being unable to fail is too much, leading to poor decisions and, ultimately, the exact circumstances the trader was seeking to avoid.
A trader must put himself in a space where, given what is at risk and what he hopes to gain, he is completely comfortable with either outcome, that is, the potential profit is worth the probable risks involved. A trader needs to learn to think that a particular trade could work, given the probabilities, not that it should work or that it will work. It must never need to work. Trading ideas that don’t work are an unpleasant yet inevitable byproduct of the process. A trader must accept that losing is part of the game and move on with the minimum of psychological damage, because there will be a lot of losing over a career. Traders are not in the perfection business. The name of the game is batting for average and controlling the risk, so that the trader can afford to play again tomorrow. Traders need to learn to trust in themselves and trust in their process. Poker, with its reduced probability set and defined outcomes, is a perfect laboratory for developing this kind of self-confidence.
Poker also teaches the difficult-to-grasp concept of divorcing the short-run outcomes from the quality of the decision-making process that created them. This may seem counterintuitive, particularly when applied to a results-centric endeavor. “Isn’t the point to win, to make money? Isn’t it a good decision if it makes money, and a bad decision if it does not?” Sometimes good decisions lose, and poor decisions win. If offered a chance to bet $1.00 to win $1.00 on the flip a coin that comes up heads 99% of the time and tails 1% of the time, any trader would be insane not to bet on heads. If, when flipped one time, the coin comes up tails, it was not a bad bet, just a bad probabilistic outcome. There will always be exogenous events and instances of random chance. Bad luck happens.
For many high achievers, not succeeding immediately as a trader may be the first significant failure in life. Athletes with experience losing have more likely developed productive coping/compensation behaviors. When I studied karate as a boy the first thing I was taught was how to fall so that I did not injure myself. Every trader must learn how to fail so that he does not hurt himself.
Good Traders Have an Ability to Suffer, or to Displace Suffering
One key survival mechanism involves having or developing a larger than normal ability to tolerate suffering or the intellectual capability to compartmentalize it. The trader must find ways of dealing with the pressure and discomfort such that it does not degrade the decision-making process. If the trader has structured and sized trades correctly and adopted a good gambler’s mindset, it is possible to not care too much about any one particular outcome, trusting that in the long run there will be more gains than losses. Sooner or later, however, every trader will misjudge the market and find out what he is made of under the worst possible circumstances.
Good Traders Learn From Their Mistakes
In any given day, month, or year, a trader’s approach to the market will be a success or a failure. It is easier to learn from failure where it is possible to start from the logical premise that the method may be flawed and forensically examine it for defects. Adapting to a changing environment while still generating productive results is vastly more difficult, and will require a visionary sense that the underlying conditions are either eroding or are vulnerable to a seismic shift. Observant traders will look for clues like a decreasing winning percentage, greater difficulty finding good trades, greater execution slippage, and thinner margins. Profitable traders are like snakes, shedding their methodologies like so much dead skin when they are no longer productive.
Making mistakes is part of the evolution of a trader, but there is no excuse for making the same mistake twice (let alone multiple times). Whenever possible, it is far better to learn from other people’s mistakes by studying other markets and trading styles and observing what does (and more importantly) does not work.
Good Traders are Hypercompetitive, Driven
Traders must first be profitable (or they will not be traders for long), and then distinguish themselves relative to their peers. Traders will be compared to their desks, to traders in other products at the firm, and to standardized industry benchmarks. They will be graded on total dollars earned relative to the cost of the resources utilized, and on the amount of risk taken. At most firms, management will start to look askance at the minimally productive trader, and will usually manufacture some reason to shuffle an underperformer into a different role (or out the door) to make room for a shiny new up-and-comer with potential.
Good Traders Work Very Hard
Good traders work much harder than average traders, and do so throughout their careers. A strong work ethic helps a trainee outlearn peers and get a shot at the desk. Junior traders must claw their way up to competency as fast as possible to keep their seats. Traders must continually out-work their peers in the market to remain profitable and be compensated for their production. Senior traders must remain current while at the same time always pushing to find the next product, market, or strategy that will expand or extend their career.
Good Traders Prepare
Good traders do vast amounts of research to minimize the chances of being surprised by a data item, research report, or economic indicator that they should have factored into their decisions. Traders are in the anticipation and reaction business. The more time spent pre-planning for contingencies, the faster and the more precise the reactions. Doing the homework allows the trader to spend the critical time period after any market event executing a plan, not pondering the possible ramifications as the market moves.
Good Traders are Positive
Good traders believe that they can accomplish what they set out to do, that through hard work and skill that they can find profitable opportunities, design and execute a trading plan, and make money for their firm and themselves over time. Part of this is having rational expectations, but most of it is fairly straightforward psychology. A baseball player who thinks he can’t hit the ball will never step up to the plate. There is no point adding artificial barriers, there will be plenty of real ones there already.
Good Traders are Ethical
Most traders are ethical because they acknowledge and accept the carrot and stick implicit in their job description. A good trader at an aggressive firm can make so much money that there is no justifiable, logical reason for them to break the law or do anything else that could jeopardize their extremely lucrative career. Being ethical is also is good for their business. Once established, a trader’s reputation becomes well known and difficult to shake. Behaving unethically eventually becomes extremely counterproductive, and failure to honor a transaction or live up to the terms of a deal will lead to an immediate cessation of business with the offending party. A trader cannot expect to get better treatment in the market than she is willing to give, and in a fast-paced environment the shoe will be on the other foot very quickly. Within the rules rough play is allowed, however, and should be expected.
For those that, for some unknown reason, do not value the tremendous privilege their position implies, there are substantial penalties for transgression, including severely punitive fines and the very real threat of significant jail time.
From Chapter 1 - Know Yourself, Pages 13-17.
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Excerpt from Trader Construction Kit Copyright © 2016 Joel Rubano. All rights reserved. No part may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the publisher, except by reviewers, who may quote brief passages in a review.