What are the mental traits a successful trader must posses?
Is it possible for anyone to be a successful trader, or is this a game only a few can win at? A few who posses the right type of brain.
Personally I believe that a large percentage of the population is not cut out for a profession such as trading and no matter how hard they try, they will fail.
Trading has very distinct ways to assess success and failure. A positive account balance, a negative balance, and the rate of growth or attrition. This is not the case with many other of life’s endeavors or professions. In many jobs one can be ordinary, are even incompetent and manage to cruise by.
As an example, I know someone who is an extremely talented artist. He has used this to his advantage and has a successful career using his talent. I also know many people that aspired to be artists who did not have even a fraction of his talent or even no detectable talent to elevate them above average. Some of them, through sheer determination, passion and incremental learning have developed somewhat successful careers in this area also. This is because something such as art and design are subjective. The measure of success and failure are not clearly defined, unlike trading.
We are used to the idea that through hard work and determination, you can achieve most things which are provably possible for a human to acheive. And in many areas, this is the case. It may just be a case of diligently putting in your 10,000 hours work.
This is the type of attitude that leads people to spend years and large sums of money on trading to no avail. These people then start to question whether it can be done at all because they think “Well if I can’t do it, no one can. Perhaps there really are no successful traders beyond those who were just lucky”. Because they assume via imprinted pop psychology that they should be able to achieve anything that is possible that they put their minds to. In other words they overestimate their own ability, and underestimate the difficulty or complexity of what they are attempting.
If this is the case, and only a select few can make it - then what are the traits that someone who is capable of trading well will posses?
Here are a few things that I think a successful trader requires:
Most people would start this list with discipline. While I agree this is certainly a necessary attribute, it is one which many possess without having the others, and I do not see it as an important one to mention. It is plainly obvious it is required.
I do not want to list things which are behaviours, for example “habits of successful people” etc. I want to list things that relate to one’s mental capacity. Whether we like it or not, our brains are all constructed differently in a physical sense, which gives rise to difference in ability for thought.
Here are a few things that make sense to me.
-A Brain which naturally understands probability.
Some people do, and some people don’t. Some people can learn the math, and some people can’t. Regardless of whether or not you can learn the math, unless you understand it innately, you will probably not succeed in trading.
-A skeptical approach to life.
This builds a logical framework on which all ideas can be tested and constructed from. I highly doubt than anyone who is into things like astrology, psychics etc etc has what it takes to be a successful trader. I say this because it shows that your either do not care about the truth, or are intellectually lazy. (I am excluding ignorance for ease here, because that could certainly be a factor in believing falsehood and not necessarily indicate a deficiency in reasoning capacity.)
-The ability to see the big picture, and link information.
This is a hard one to describe. For people that posses this quality it happens naturally and inescapably. Correlations are seen easily, patterns are easily picked out and variance can be seen quickly. I suspect this is where the real talent lies. This is why successful traders will say “I could teach you what I know, but even then you would not be able to trade like me.”
While not a comprehensive list, these things seem to me to be some of the key ingredients to trading success. From what I have observed, it is very rare to find people who are able to excel in all of these criteria.
Anyone agree/disagree/have others to add?
Disclaimer: This is purely my opinion and just speculation on my part for the sake of discussion. I have no proof of what I have written and could very easily be wrong.
Last edited by Twiddle; March 7th, 2011 at 12:20 AM.
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There are quite a few "qualities" and "attributes" a day trader must possess.
The most paramount is discipline.
I have a pretty significant background in gambling. I've probably spent more time in a poker room than anyone I know.
Like trading, there are literally hundreds of thousands of poker players who know "how" to play the game. They know all the rules, all the inputs/outputs, most can probably calculate odds on the spot, they understand advanced concepts like position and bet size and pot odds.
The real difference between successful poker players and losers is discipline. If I had a $ for every time I heard "This is probably gonna be a dumb move" or "Well, you've probably got me beat...."
I've seen guys who are decent players make 1 stupid move which totally destroys hours of success and takes their chip stack all the way to the felt on the table.
Trading is similar to me. It's emotional. It's easy to get caught up in the stress of the moment.
As I posted in another thread about auto trading, there are 3 main emotional events to trading. Entry, taking profit and stopping loss.
Entry is frought with greed (you're kicking ars and think you're invincible) or fear (you've recently been stung badly and now you're gunshy to get back in it).
Taking profits is greed. "Do I get out now and take the profits?...If I leave, am I leaving money on the table?"
And the most dreaded is stopping loss....."Should I bail on this trade, or hang tough and wait for it to come my way."
Aside from discipline (which helps overcome the emotion of trading), the other aspect that I find paramount is the ability to leave your ego at the door. I know a few guys that have tried trading and they got crushed, simply because they could not accept that a certain strategy or philosophy wasn't reliable.
Next is the ability to correctly apply "root cause analsysis." Some guys will observe an event or group of events and TOTALLY miss the root cause....how many times have you heard "well it did this yesterday and did the same thing the day before therefore it MUST do the same thing today." Wrong. Logic fail. Spurious relationship. Being able to analyze and final commonality among events requires you to be able to objectively see inputs and outputs that are oblivious to others. I have a buddy who's convinced that the reason he's lost money isn't because he didn't properly use stops or his strategy failed, but because he traded at the wrong time of day.....so between his ego and his lack of being able to properly recognize the root cause of his failure, what he'll end up doing is trading at some other time, only to find that the markets surprise you and eventually, the same conditions will occur at a different "time" and knock him out again.
A successful day trader has to be heady, disciplined, ego free and able to quickly and accurately determine why and how things occur in the market.
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I read this one the other day regarding Lance Armstrong:
"Hates to lose but isn't afraid of losing".
I think that sums up a key trait of the successful traders I know. Focused on doing all the right things (the hard training as Lance puts it) to mentally set themselves up for success but knows that one lost race (or trade) isn't going to end their career. This mental ability gives him the ability to ride well even when a lot of other people would choke under the pressure. Essentially with most people their trading looks like this:
Lost trade becomes fear becomes losing streak becomes more fear of losing becomes less hard work becomes less engaged/thinking trading is impossible becomes more losing/blow out account.
A winning mindset would look like this:
Lost trade becomes anger becomes reflection/determination becomes more hard work becomes fewer losing trades becomes knowledge that long-term success is possible becomes long-term success.
I'm sure many of you have read the oft mentioned but never proven idea that successful traders are indifferent to losing trades. I strongly disagree. Emotions are not your enemy. A great example of this was watching an old 1980s video of Paul T. Jones after losing $6million one day. His statement at the time, "you (refering to the market) will PAY tomorrow). And so it did. Of course as most competitors know there is a fine line between getting revved up and being out of control. Paul didn't pull his stops. He exited the losing trade when he knew his idea of the market was wrong (at least that day).
Personally I find that I trade best when I'm focused, slightly disgusted with my performance, and determined to trade "my best". In this mode I'm constantly reviewing what I did well/poorly in my previous trades and am determined to trade "well" even if that means losing trades.
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a) You need clearly defined reason for being in this business (or, any business for that matter).
b) That reason must be a motivating factor sufficient to keep you going when everything and everyone else around you tells you to quit. If you have not felt like quitting yet don't worry, that day will come.
c) You need strong self-discipline and the ability to mentally focus - well above average levels. You must be capable of motivating yourself through adversity. If you don't know what adversity looks like that's ok, just keep trying to be a successful trader - you will learn quickly what it looks like and whether or not you are fit to handle it.
d) You need to be able to replace emotion with logic and reason. Trading is a logical enterprise - there is little room or need for emotional input.
e) You need to be or become rock solid decision maker. A lot of people think they are good decision makers, until they start trading and then they question they ability to make good decisions. Rest assured, you WILL question your ability to make good decisions - we all do. The difference between those who can make good decisions is practice! There is no magic to making good decisions. The more you do it, the better a decision maker you will become. But, if you quit immediately after a failure, then you will forever question your ability to make good decisions. Decision making is HUGE in the trading business. MASSIVE. EPIC. It is darn near everything there is in trading.
f) If you are married, then you will need a spouse willing to support YOUR learning curve. Make no mistake about that. So, between the two of you, you had better have enough resources to pay for your education, until you can start paying the bills from the trading enterprise.
g) You will need to get used to working extremely long hours during your learning curve phase - which could take years. Some can do it in months, but those are rare, rare, extra rare exceptions to the rule. Becoming a skilled trader takes about just as long as it does to become a skilled Surgeon. Would you trust a Surgeon, fresh out of Residency with your body? Of course, not and neither does the medical profession. Neurosurgeons, take twice as long (at least) before anyone lets them near a real human brain with a scalpel. Yet, the average person risks their family's entire life savings on a live account, after a weekend Boot Camp, while calling themselves a Professional Trader in the process. Put in the hours. Serve the time. Do the homework. There are no shortcuts. This is a mission critical Profession, not a hobby. Failure is not an option and every trade is a mission.
If you want to be the best, it takes time. The best of the best already know this as gospel truth.
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I've found out that skepticism is one of the most important traits to have when it comes to trading (and in life but that's off topic). I'm always doubting my own and others (e.g. media, participants, etc.) opinions and conclusions. In a way, I'm operating with the null hypothesis. I always assume that an idea (or hypothesis) is false until proven wrong via solid evidence AND of course via the response of the market. This is of course very stressful, but I've found out that is is the only reliable way to arrive at solid (but not absolutely true) ideas/conclusions/hypothesis. So, in a nutshell, one should always be doubting and let evidence and market response be the most reliable decision-making guides. IN MY HUMBLE OPNION.
You can't take yourself too seriously. If you think of yourself as a great trader who understands probability and you're going to make money no matter what, what happens when you make a bad trade? It shatters your reality to a degree.
Now, if you do away with your ego then a loss isn't going to pull you down.
What does it mean to throw away your ego?
1) Don't have expectations of success for yourself.
2) Don't take success for granted.
3) Accept that losses WILL happen.
4) Don't look back. (Keeping track of statistics is a good thing and they can help you make sure you're profitable in the long run so that you may trust your system)
5) Focus on the possibilities and not on your past losses.
6) Learn from your mistakes.