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How a trader's brain REALLY works
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How a trader's brain REALLY works

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How a trader's brain REALLY works

I was a profitable trader for many years and have trained many successful ( and not so successful) traders. I found the recent research about what goes on inside a trader's brain interesting — but not quite right.

The findings suggest that successful traders get a signal from a part of their brain that it's time to sell before a peak is reached. I believe there are some characteristics that are innate (such as being intelligent) but I think being a good trader can be taught. I think there clues in real-world scenarios that can signal potential trading prowess. Here are examples to see if you have the chops to be a good trader.

What does a good trader see as a child?

Simple. Were you a hustler or not? Did you run a successful paper route or hot dog stand, pass it on to your enterprising younger brother and have him do all the work while you still split all future profits? Did you run the NCAA basketball pool or fantasy football league and keep 20 percent for management fees because you were better at math? Did your friend lose a lot of money at the track and to pay off his debt you lend him $100, but as collateral you will keep his $800 Mongoose mountain bike until he pays you back? If so, you are off to a good start. In each case, you saw an opportunity and profited off of it. A good trader at any age sees an opportunity and profits off of it.

What does a trader see when stuck in traffic?

When people sees crowds most people see chaos and are stressed out. When a good trader sees the same, we see opportunity. A good trader enjoys outsmarting everyone else. When stuck in a traffic jam, a good trader uses the right lane because all the stupid people wrongly assume the left lane is the fast lane. Also, the right lane gives you the opportunity to use the shoulder as well as the merge lane and you can usually skip 10 cars or so and save that valuable one minute.

A good trader also goes as far as he can before he gets into the crowded exit or toll lane. A good trader goes around all the traffic and when you get to the front, he feigns surprise and is very emphatic in his thank you to the person that let him in. Likewise, when someone else tries that move on you, you don't let him in. A good trader is way too smart for that move. You have earned that spot.

What does a trader see at the airport?

Everyone hates flying mostly because of the security-check process. If you have $100 million or $100 to your name and you fly commercial, you wait in the same line. At the security check, a good trader counts the number of people in each one of the security lines and chooses his target. Not all lines are the same. But it's more than just numbers. A good trader takes into account other factors and makes his assessment. I have a system which is kind of like counting cards in blackjack. Choose a line with people in suits, people that look like they have high IQs, and people under 50 who are traveling alone. These people move the line along.

On the other hand definitely avoid lines with kids with strollers, older people, big travel groups, and people who look like they don't speak English. These are line killers. They take the time of 5-10 people. They don't know the rules? Come on Einstein, you didn't know that your Casio was going to set off the metal detector? They ask stupid questions like, "Why do we have to take our shoes off? I am not a terrorist." They will ruin your chance to get a Bloody Mary at the bar before your flight to Vegas.

What does a trader see in a person who's usually wrong?

Part of being a good trader is more than doing your homework. It's watching patterns and watching other people's track record. Having someone consistently right can be a great person to befriend but everyone wants to be friends with him. It's hard to get into that inner circle. However, if you are smart then befriend the person that is always wrong. If he is consistently wrong, it is easy to befriend him and just as profitable.

We call someone who is always on the wrong side of every trade, the "mush." The guy who bet against Brazil every game until they played Germany. The guy who bought Crumbs Bake Shop at $14 back in July of 2011 and is still long the stock at 24 cents. The guy who goes last at the gang bang.

I used to have a few mush clients who always wanted to buy at the highs of the session or sell at the lows. I usually gave them price improvements because they were VIP customers. They were terrible traders but I had to keep them from being fired. If they lost their jobs, it would be a big hit to my bottom line.

What does a good trader see at a casino?

A good trader tries to spot the mush at casinos. It works very well in craps because it is the one game where you can bet with the house (casino). In it's simplest form, in craps you can either bet on the shooter (pass line) or against the shooter (don't pass). I would estimate that 95 percent of people bet on the shooter (pass line) because it's more fun and there is the camaraderie of rooting for the shooter.

If you spot the mush and don't care about being hated by the rest of the table, then bet against the shooter (don't pass). If you work on Wall Street they probably already hate you already, so who cares?

I remember a time I was watching my friend play craps. There were two people at the table — the shooter and him. The shooter was betting $5 on himself every time he rolled and my friend was betting $1,000 against the shooter. The guy lost 20 bets in a row. My friend won 20 in a row. The shooter lost $100. My friend won $20,000. Afterward, the shooter approached my friend and asked, "Hey, Wall Street. How about a tip for the shooter?" My friend replied, "Here's a tip. Next time you play craps, bet against yourself."

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You are describing high risk intelligence.

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