Several months ago, I wrote a post for Forbes that asked the question: Do you have what it takes to succeed in financial markets? That article tackled several myths regarding trading and success and reviewed outcome studies that found success to be present, but quite rare. In a recent study, Brad Barber and colleagues studied all individual traders participating in the Taiwan stock market over a 14 year period. Interestingly, they plot a survival curve for traders and found that 75% of all participants quit after a two year period and 90% are gone after four years, with poor performers significantly more likely to quit than their more successful counterparts. Over the period studied, the group of traders was unprofitable every year net of fees. They cite evidence that traders engage in more trading following profitable periods. They conclude that traders persist in pursuing profits, not because of objective evidence of success, but because of overconfidence following wins.
As a psychologist working as a performance coach at trading firms, I have had a multi-year front seat to the successes and failures of traders. My interpretation of the dismal success rate data is somewhat different from that of the researchers. In any elite performance field, whether it be golfing, acting, chess, or Olympic sports, many are called and few are chosen. The proportion of participants that ultimately make a solid living from their performance is quite small. The important questions pertain to the talent, skill, and development factors that differentiate the elite few from the others. In an insightful post, Mike Bellafiore, founder of a proprietary trading firm, observes that the success rate is indeed low and that it takes at least 6-8 months of dedicated effort just to get to the point of consistent profitability (and easily twice that to achieve elite levels of success). Having worked with traders at his firm, SMB/Kershner Trading, I can vouch for that fact and can also vouch for the fact that training increases the odds of success well above the dismal levels observed by researchers.
So what speeds the learning curves of developing traders and raises the odds of their success? I contacted several successful educators and trainers of traders to get their perspectives on what it takes to sustain profitability. Here are a few observations:
Training and mentoring matter – Regardless of the domain–sports, music and art, commercial trades, medicine, law–we find coaching and mentoring as central elements of training. In college basketball, for example, we find coaches with strong lifetime records of success, producing many eventual NBA stars. This mentoring involves teaching, but also the intensive drilling of skills, regular feedback about performance, and far more practice time than playing time. This latter point is especially important. A surgeon spends many hours studying anatomy with cadavers–and years of observing and assisting procedures–before ever conducting a single operation. Years of physical development and skill development go into the eventual performance of any Olympic athlete. Too often, individual traders hope to make it on their own, aided by little more than a few books or didactic courses. This would not work in any performance field and is a major reason why the success rate is so low in the trading world.
Detailed mechanics matter – Success in financial markets entails far more than the application of technical indicators, chart patterns, or headline fundamentals. When we look at the actual instruction given to traders who succeed, what stands out is the level of detail. A baseball coach, for example, will work for hours with a developing pitcher to perfect the mechanics of delivery and ensure that each pitch is delivered the right way. The same is true with the training of professional golfers and singers. Performance is broken down into components–and those components are taught and reviewed rigorously. A good example in the trading world is Peter L. Brandt, who uses chart patterns on differing time frames to develop ideas and to structure favorable risk/reward in the trading of those ideas. He advances the idea that successful traders find their “sweet spot”, in which they are best able to apply their pattern recognition skills. He regularly describes his trades–and the reasoning behind them–to learners, and he keeps track of his trading results in real time. This allows developing traders to “copy the master” and learn the mechanics of trading in real time.
Focus matters – Nate Michaud, who oversees the Investors Underground learning community of traders, points out that “focus” and “patience” are essential to cultivating trading success. “The biggest hurdle is getting traders to focus,” he points out, “Cut out ALL of the noise.” Much of the chat and support within the community is designed to reinforce key lessons about risk management, the management of trading positions, and the maintenance of a proper mindset. “Even or up is a powerful thing,” Nate points out. “It’s ALL about minimizing the drawdown days.” Significantly, the Investors Underground program makes use of regularly updated stock watch lists with trading plans and rationale, as well as a library of videos detailing trading methods. The idea is to not only encourage focus, but also advance the information and skills most worth focusing upon.
Role-modeling matters – Bao Nguyen, perhaps better known to the trading world as Modern Rock, has recently worked with Alex Temiz and others to develop an online trading community, MyInvestingClub.com. As Bao observes about the community, “All the mentors and trainers are traders.” He points out that much of the learning occurs when members observe him trading, so that they can see how trading is conducted, from the inception of an idea to its execution as a position. “The students see my trades,” he points out. “They see me make mistakes, they see me lose, they see me learn from my mistakes, and of course they see me win, profit, and how I handle the win and not become arrogant. My students can relate to all these experiences along with me because I am also a student!” This role-modeling means that the goal of training is not simply to copy the trades of others, but to understand the processes of sound trading. Bao explains that this means learning the patience and discipline of avoiding common emotional pitfalls, such as placing trades out of a fear of missing out on a move (FOMO), by seeing how proper trading is conducted.
Expectations Matter – Jason Graystone of Tier One Trading is involved in training retail traders, making use of a platform that combines multiple online courses with interactive, live trading rooms. Jason stresses that many traders fail because they come to markets with unrealistic expectations. This means carefully assessing the reasons for pursuing trading and directly addressing issues of starting capital, achievable returns, and length of time required for success. He describes the online community as an “accountability group”, where members share results with others and hold each other accountable for goals they have shared. Part of that accountability involves testing out their ideas before they go live, including through practice/simulated trading. “Testing gives them the mental stability of knowing the story they are in,” Jason observes. “When you know the probabilities of what’s likely to happen next, it keeps you calm through draw downs and losing trades. It also helps with not becoming cocky during the euphoric feeling during the winning streaks.” The goal is to help traders treat their craft professionally, as a business.
Testing gives them the mental stability of knowing the story they are in.
An important theme emerges from the observations of those engaged daily in the training of traders: success is a function of guided, directed interaction. The old model of trader education featured classes, seminars, and isolated didactic experiences. The new model is all about learning within a community, at proprietary trading firms and via online communities. This interactivity enables developing traders to learn from the masters and also to learn from one another. As in the field of medical education, the watchword is “each one teach one.” I am beginning to see yet a newer generation of training efforts grounded, not only in the teamwork of individual traders, but in the alliance of traders and machines. The integration of technology and quantitative trading methods with discretionary trading skills is a rapidly evolving area. It may well be that the training programs of the future not only teach trading processes, but also the programming, data management, and quantitative skills needed to uncover opportunities in increasingly challenging and efficient markets.
– Dr. Brett Steenbarger