Tuesday, June 13, 2006

Blueprint for an Uncompromised Life - Part Three: Resilience

One of the most notable findings in the research on extraordinary creative achievement is that even the greatest performers in their fields produce the same ratio of undistinguished works to notable ones through their careers. Great scientists conduct many unsuccessful experiments; outstanding artists produce many paintings and works of music that never win recognition. Many of the greatest home run hitters have are also leaders in strike outs; the most successful companies, like the best actors and directors, also produce many flops in the marketplace.

What makes the expert performer distinctive, researcher Dean Keith Simonton has found, is that he or she is so productive that it becomes more likely that enough successful experiences will accumulate to leave behind a legacy of achievement. We can think of this in evolutionary terms: the great individual produces many more mutations than the average person. Most of these mutations die off, but those who have produced the most variations will, in the end, have the best chance of being represented among the survivors.

This has huge relevance to trading, as it is not necessarily the case that the most successful traders are the ones with the highest ratio of wins to losses. Very successful traders have typically undergone very significant losses. Because, however, they stay in the game longer--through sufficient capital and superior risk management--they are more likely to eventually enjoy and compound the large winning trades than the average trader.

What this means is that a prerequisite of a high level of success is a high level of resilience with respect to loss and defeat. If the greatest individuals are the ones who are most productive, they will also be the ones with the most failed efforts. Research on psychological resilience suggests that people can survive and even thrive in conditions that others find traumatic. Their coping methods enable them to find meaning and purpose even in the greatest adversity, and they are most likely to maintain social and emotional ties during the hardest times.

In my own studies of traders, I have found a correlation between the success of the trader and the degree to which the trader utilizes problem-focused coping and a coping mechanism called "positive reappraisal". The successful individuals deal with problems as they occur, rather than become wrapped up in blaming of self or others. After they have dealt with the problems, they look back on their experience and try to take away something positive from the experience. For them, adversity becomes a tool of learning--not a defeat.

There are traders who are defeated by losses and there are traders who cope with losses. The highly successful individual, however, is the one who turns losses into gains by generating learning experiences and continuous self-improvement.


yinTrader said...

Hi Brett

I am inspired by your Blueprint for an Uncompromised Life, part 3 : Resilience.

As a novice trader, I have been impatient and lost big in a few trades compared with win small in many trades.

However, I am learning how to improve with sticking to a mechanical system, BarroMertics, putting in money management risk in addition to waiting for the market to come to me: with zone, trend and trigger.

By implementing Risk Reward ratio, I hope now to recover and make a few big wins as against many small losses, to give me a net profit in good time.


Brett Steenbarger, Ph.D. said...

Thanks for the note. Knowing risk/reward ahead of the trade and limiting trades to high risk/reward situations is a most proactive approach to dealing with loss.


Raymond said...

Hi Brett, can you post links to the Blueprint, parts 1 & 2 ?

Thanks Randy

Brett Steenbarger, Ph.D. said...

Hi Raymond,

Actually it's a five part series that you can access in the archives by clicking on 2006 and June. Thanks--