Friday, May 12, 2006

Ten Questions That Go Bump in the Night

Why do the gurus who proclaim a "feel" for the market tell us to eliminate emotions from trading?

Would 80% of traders make money instead of losing it by placing trades through "enrichers" instead of "brokers"?

Why do people who offer programs on making a living from trading make their livings from offering programs?

Why do beginners think they'd have an easier time beating professionals at trading than at golf, boxing, racecar driving, or chess?

Why are so many market newsletters bullish or bearish, when the most common market outcome is little or no change?

Why, in Dr. Brett's surveys, do three-quarters of all traders rate themselves above average?

Why are there no books on mastering the mental game of surgery or ballet?

What happens when contrary opinion is the dominant school of thought?

Why do trend followers follow trend following once it goes out of favor?

If exchanges make more money than brokers; brokers make more money than market makers; and market makers make more money than traders, is the answer to success in the markets to always have people who are your customers?


I want to thank readers for their interest in the new highs/new lows stats mentioned in my recent article. I'll continue to post those on my Weblog. Have a great weekend--



TraderEyal said...

That's an interesting and amusing list :) I liked this one: "Why are there no books on mastering the mental game of surgery or ballet?". And then I thought about it a bit, and I guess the answer could be that unlike many other professions, trading is counter-intuitive for most people. While in surgery when you have a problem and you need to stop a bleeding you can't possible think in terms of maybe I'll cut it further (throw more money at it) and I'll be ok later in time..

Brett Steenbarger, Ph.D. said...

Good point; violating your stop loss as a surgeon certainly has greater consequences than it does for traders!


SparkyFX said...

This is a good read! I have spoken with a host of successful professionals in various industries and they all seem to have the common trait of visualization. Visualizing the outcome can help managing the mental game in the heat of battle. I am sure the surgeon walks through the surgery prior to the first cut.

Brett Steenbarger, Ph.D. said...

Thanks for your note. There is, indeed, a large body of research on the value of visual imagery in cognitive-behavioral change techniques and in sports psychology. A trader trapped in negative thinking and worry also attests to the power of imagery--in reverse. My observation, FWIW, is that too few traders and mentors of traders understand cognitive-behavioral work and how to best utilize imagery, techniques for changing thinking patterns, etc.


nat said...

Brett, these are good quesitons, i think they were rhetorical but I will put in my two cents.

1. people want bullshit artists, so that is what they get.

2. I doubt it. you can't get something for nothing, typically.

3. Because manipulating others emotions such as greed is an easier and more stable way to make a living. Creating a bull market in someones mind is easier than guessing correctly buy or sell.

4. The barriers to entry are low. No one whos day job is 48 year old lawyer is dumb enough to show up for the Bulls tryouts. combine this with the historic upward drift of the stock market, and people want to take a shot. If they hold long on the long side it just may work out well.

5. Because, most make money off of a directional move, so they want to know if the market is going up or down.

6. Because it may be true. If the worst traders are bad enough, maybe 3/4 of traders are above average.

7. these fields are not shrowded in mysticism, hope, greed. The hard working life of purposeful, focused thought and action may be the opposite mentality of what brings most to the markets.

8. This is impossible, cycles change so what is or is not contrarian changes. yesterdays contrarian viewpoint is not todays.

9. Fund investors chase recent performance.

10. YES.. Unless you are managing over 200 million of your own. At that point, u can invest and diversify and be fine without customers.

Brett Steenbarger, Ph.D. said...

"The hard working life of purposeful, focused thought and action may be the opposite mentality of what brings most to the markets."

That is beautifully stated and sadly true for many people. You've captured very nicely what appeals to me about the markets and the bond that I feel with all serious traders: the exercise of that purposeful, focused thought and action.

Thanks for those perspectives.


envirotrader said...


I also value your input and thoughts. I was wondering, given the recent move in the markets, if you could expend on the VIX and movement relative to its 20-day moving average. I read recently in the West Coast Trader Bog at that this may be a heads up to future market action. Many thanks.

Brett Steenbarger, Ph.D. said...

Thanks; I'll see if I can look at that this week. It's interesting that several people have asked me about the relatively elevated VIX here, apparently anticipating a bottom. A different measure that might be relevant is the extreme negative breadth of the recent decline.


John Wheatcroft said...

"Why do beginners think they'd have an easier time beating professionals at trading than at golf, boxing, racecar driving, or chess?"

Why do beginners have to be "beating" someone?

I'm trying to make a living not "beat" somebody else. I'm succeeding - it isn't easy. What does that make me - a professional? I don't think so. The day I consider myself a "professional trader" is the day I should quit. What I do consider myself is an analyst who trades stocks. I'm an excellent analyst and a fair trader. I still make mistakes but I learn something new every day.

As for the VIX - I've been watching it for years. Whenever it is 10% or more away from its 10 day SMA the market changes direction. Immediately? No, but within a day or two generally.

You should be able to do your own analysis on this Brett given your resources.

Brett Steenbarger, Ph.D. said...

Great point; thanks. Beginning traders are best off "beating" their own performance (i.e., making steady improvements), not trying to reach artificial P/L goals. I'll look into the VIX analysis; easy to do, but *so* many people are looking at it that it makes me nervous.


procol said...

That's a very amusing list.

The short answer is, the exchange and brokers, make most of the money because they don't have to 'know' anything, or be 'right' to make money

They are vig takers, not risk takers.

Market makers , do have to know something, but they are usually in a position of advantage, in terms of order flow , low costs, or other information.

Traders on the other hand have to be right about the trade, at least on average. They have to be better than the crowd, where for the most part, the other players do not. They are the house.

Brett Steenbarger, Ph.D. said...

Yes, I think you're right. Who takes the vig and who pays the vig is a major determining factor in who is successful. It takes a competent active trader to merely cover costs, given commissions, the cost of equipment and software, and bid/ask slippage. Thanks for the note--